To amend the Internal Revenue Code of 1986 to require gain recognition in the case of certain transactions that are equivalent to sales of financial instruments.

Summary: Amends the Internal Revenue Code to provide that if there is a constructive sale of an appreciated financial position:  (1) a taxpayer shall recognize gain as if such position were sold for its fair market value on the date of the constructive sale; and (2) for purposes of the treatment of gains and losses for periods after the constructive sale, 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 by reason of the above and the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale.

SECTION 1. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL 
              POSITIONS.

    (a) In General.--Part IV of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new section:

``SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED FINANCIAL 
              POSITIONS.

    ``(a) In General.--If there is a constructive sale of an 
appreciated financial position--
            ``(1) the taxpayer shall recognize gain as if such position 
        were sold for its fair market value on the date of such 
        constructive sale (and any gain shall be taken into account for 
        the taxable year which includes such date), and
            ``(2) for purposes of applying this title for periods after 
        the constructive sale--
                    ``(A) 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 by 
                reason of paragraph (1), and
                    ``(B) the holding period of such position shall be 
                determined as if such position were originally acquired 
                on the date of such constructive sale.
    ``(b) Appreciated Financial Position.--For purposes of this 
section--
            ``(1) In general.--The term `appreciated financial 
        position' means any position with respect to any stock, debt 
        instrument, or partnership interest if there would be gain were 
        such position sold.
            ``(2) Position.--The term `position' means an interest, 
        including a futures or forward contract, short sale, or option.
            ``(3) Treatment of limited-term interests.--Except as 
        provided in regulations, the term position shall not include 
        any interest that has a term of 3 years of less.
            ``(4) Positions as to which gain or loss is otherwise 
        recognized during the taxable year.--The term position does not 
        include any position that--
                    ``(A) is sold or disposed of during the taxable 
                year in a transaction in which gain or loss is 
                recognized, or
                    ``(B) is marked to market under section 475, 
                section 1256, or any other provision.
    ``(c) Constructive Sale.--For purposes of this section--
            ``(1) In general.--A taxpayer shall be treated as having 
        made a constructive sale of an appreciated financial position 
        of the taxpayer (or a related person) enters into any of the 
        following transactions and the transaction has not been closed 
        or terminated within 1 year of the date it was entered into--
                    ``(A) making a short sale of substantially 
                identical property,
                    ``(B) entering into an offsetting notional 
                principal contract with respect to substantially 
                identical property,
                    ``(C) entering into a futures or forward contract 
                to deliver substantially identical property,
                    ``(D) in the case of an appreciated financial 
                position that is a short sale or a contract described 
                in subparagraph (B) or (C) with respect to any 
                property, acquiring substantially identical property, 
                or
                    ``(E) to the extent provided in regulations having 
                prospective effect, entering into 1 or more other 
                transactions (or acquiring 1 or more positions) that 
                have substantially the same effect as a transaction 
                described in any of the preceding subparagraphs.
        A constructive sale shall be deemed to occur on the date that 
        is 1 year after the date on which the transaction described in 
        subparagraphs (A) through (E) is entered into.
            ``(2) Related person.--A person is related to another 
        person with respect to a transaction if--
                    ``(A) the relationship is described in section 267 
                or 707(b), and
                    ``(B) such transaction is entered into with a view 
                toward avoiding the purposes of this section.
            ``(3) Special rule for debt instruments.--For purposes of 
        paragraph (1)(A), positions in interest rates shall be treated 
        as positions in property which are substantially identical to 
        debt instruments.
    ``(d) Other Definitions.--For purposes of this section--
            ``(1) Forward contract.--The term `forward contract' 
        includes a fully or partially prepaid forward contract.
            ``(2) Offsetting notional principal contract.--The term 
        `offsetting notional principal contract' means, with respect to 
        any property, an agreement to pay the investment yield 
        (including appreciation) on such property for a specified 
        period in exchange for the right to be reimbursed for any 
        decline in the value of such property and for other 
        consideration.
    ``(e) Special Rules.--
            ``(1) Treatment of subsequent sale of position.--If--
                    ``(A) a taxpayer (or a related person) enters into 
                a transaction described in subsection (c)(1) with 
                respect to any appreciated financial position,
                    ``(B) such position is subsequently sold or 
                otherwise disposed of, and
                    ``(C) at the time of such sale or disposition, the 
                transaction described in subsection (c)(1) remains open 
                with respect to the taxpayer or any related person,
        solely for purposes of determining whether the taxpayer has 
        entered into a constructive sale of any other appreciated 
        financial position held by the taxpayer, the taxpayer shall be 
        treated as entering into such transaction immediately after 
        such sale or other disposition.
            ``(2) Certain trust instruments treated as stock.--For 
        purposes of this section, an interest in a trust which is 
        actively traded (within the meaning of section 1092(d)(1)) 
        shall be treated as stock.
            ``(3) Multiple positions in property.--If there is a 
        constructive sale of a portion of any property held by the 
        taxpayer, the determination of the specific property which is 
        deemed sold shall be made in the same manner as if the 
        constructive sale were an actual sale; except that property 
        treated as sold by reason of a prior constructive sale that 
        remains open shall be disregarded.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for part IV of 
subchapter P of chapter 1 of such Code is amended by adding at the end 
the following new item:

                              ``Sec. 1259. Constructive sales treatment 
                                        for appreciated financial 
                                        positions.''
    (c) Effective Date.--The amendments made by this section shall 
apply to constructive sales after the date of the enactment of this 
Act.