A “conversion transaction” is a transaction from which substantially all of the taxpayer’s expected return is attributable to the time value of the taxpayer’s net investment in the transaction, and that is (1) a transaction that encompasses an acquisition of any property and a substantially contemporaneous agreement to sell such property (or substantially identical property) at a price determined in accordance with the agreement; (2) an applicable straddle; (3) any transaction that is marketed or sold as producing capital gains from a transaction from which substantially all of the taxpayer’s expected return is attributable to the time value of the net investment in the transaction; or (4) any transaction specified in future regulations.1 In short, a conversion transaction is a financial arrangement that resembles a loan in an economic sense.
An “applicable straddle” means any straddle within the meaning of IRC Section 1092(c), except that the term “personal property” includes stock.2
The income tax consequences of conversion transactions are explained in Q 7616.