7621 / How is a constructive sale of an appreciated financial position treated for tax purposes?

For purposes of the tax treatment of the position after a constructive sale has been taxed under IRC Section 1259, the IRC states that “proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account” under the constructive sale treatment described above.² Since constructive sale treatment by definition applies only to appreciated financial positions, this provision should have the effect of increasing the taxpayer’s basis for purposes of any future disposition.³

The taxpayer must also begin a new holding period, as if the appreciated financial position were originally acquired on the date of the constructive sale.⁴ Except as provided in future regulations, a constructive sale generally is not treated as a sale for other IRC purposes.⁵

Part of the complexity of IRC Section 1259 treatment lies in the fact that some positions constitute an appreciated financial position, some transactions result in a constructive sale, and some (depending on the taxpayer’s other holdings) can do either. For example, a short sale can constitute either an appreciated financial position or a constructive sale, depending on the taxpayer’s other holdings. The same is true of certain futures or forward contracts and offsetting notional principal contracts.⁶