7615 / What is a “conversion transaction”?

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.

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1.   IRC § 1258(c).

2.   IRC § 1258(d)(1).