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.
    ``(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 
        if the taxpayer (or a related person)--
                    ``(A) makes a short sale of the same or 
                substantially identical property,
                    ``(B) enters into an offsetting notional principal 
                contract with respect to the same or substantially 
                identical property,
                    ``(C) enters into a futures or forward contract to 
                deliver the same or 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, acquires the same or substantially identical 
                property, or
                    ``(E) enters into 1 or more other transactions (or 
                acquires 1 or more positions) that have substantially 
                the same effect as a transaction described in any of 
                the preceding subparagraphs.
            ``(2) Exception for transactions marked to market.--The 
        term `constructive sale' shall not include any transaction if 
        the appreciated financial position which is part of such 
        transaction is marked to market under section 475 or 1256.
            ``(3) Exception for sales of nonpublicly traded property.--
        The term `constructive sale' shall not include any contract for 
        sale of any stock, debt instrument, or partnership interest 
        which is not a marketable security (as defined in section 
        453(f)) if the sale occurs within 1 year after the date such 
        contract is entered into.
            ``(4) Exception for transactions which are closed by year 
        end.--In applying this section, there shall be disregarded--
                    ``(A) any appreciated financial position which is 
                sold or otherwise disposed of during the taxable year 
                in a transaction in which gain or loss is recognized, 
                and
                    ``(B) any other transaction (which would otherwise 
                be treated as a constructive sale) if--
                            ``(i) such transaction is closed before the 
                        end of the taxable year, and
                            ``(ii) in the case of a transaction which 
                        is closed during the last 30 days of such 
                        taxable year, another transaction with 
                        substantially the same effect as the closed 
                        transaction is not entered into during the 31-
                        day period beginning with the date on which 
                        such transaction was closed.
            ``(5) 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.
            ``(6) 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 which was 
        deemed sold.--If--
                    ``(A) there is a constructive sale of 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 resulting in the constructive sale of such 
                position is 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) Securities Traders May Elect Mark to Market.--Subsection (d) of 
section 475 (relating to mark to market accounting method for dealers 
in securities) is amended by adding at the end the following new 
paragraph:
            ``(4) Securities traders may elect mark to market.--In the 
        case of a person engaged in the trade or business of being an 
        active trader in securities--
                    ``(A) such person may elect to be treated as a 
                dealer in securities for purposes of this section, and
                    ``(B) securities held by such person in connection 
                with such trade or business shall be treated as not 
                held for investment.
        Such an election may be made without the consent of the 
        Secretary and, if made, shall apply to the taxable year for 
        which made and all subsequent taxable years unless revoked with 
        the consent of the Secretary.''
    (c) 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.''
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (3), the 
        amendments made by this section shall apply to--
                    (A) any constructive sale after the date of the 
                enactment of this Act, and
                    (B) any constructive sale after January 12, 1996, 
                and before the date of the enactment of this Act, but 
                only if, on the date which is 30 days after the date of 
                the enactment of this Act, the taxpayer owns the 
                appreciated financial position subject to the 
                constructive sale and the transaction that resulted in 
                the construction sale remains open with respect to the 
                taxpayer or a related person.
        In a case to which subparagraph (B) applies, section 1259 of 
        the Internal Revenue Code of 1986 (as added by this section) 
        shall be applied as if the constructive sale occurred on the 
        date which is 30 days after the date of the enactment of this 
        Act.
            (2) Special rule.--In the case of a decedent dying after 
        the date of the enactment of this Act, if--
                    (A) there was a constructive sale on or before such 
                date of enactment of any appreciated financial 
                position, and
                    (B) on the day before the date of the decedent's 
                death, the transaction resulting in the constructive 
                sale of such position is open with respect to the 
                decedent or any related person and gain has not been 
                recognized under section 1259 of the Internal Revenue 
                Code of 1986 (as added by this section),
        for purposes of such Code, such position (and any property 
        related thereto, as determined under the principles of section 
        1259(d)(1) of such Code (as so added)) shall be treated as 
        property constituting rights to receive an item of income in 
        respect of a decedent under section 691 of such Code.
            (3) Election of securities traders to be treated as 
        dealers.--
                    (A) In general.--The amendment made by subsection 
                (b) shall apply to taxable years beginning after the 
                date of the enactment of this Act.
                    (B) 5-year spread of adjustments.--In the case of a 
                taxpayer who elects under section 475(d)(4) of the 
                Internal Revenue Code of 1986 (as added by this 
                section) to change its method of accounting for its 
                first taxable year beginning after the date of the 
                enactment of this Act, the net amount of the 
                adjustments required to be taken into account by the 
                taxpayer under section 481 of the Internal Revenue Code 
                of 1986 shall be taken into account ratably over the 5-
                taxable year period beginning with such first taxable 
                year.

SEC. 2. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES UNDER SECTION 
              351.

    (a) In General.--Paragraph (1) of section 351(e) of the Internal 
Revenue Code of 1986 (relating to exceptions) is amended by adding at 
the end the following: ``The determination of whether a company is an 
investment company shall be made by taking into account all stock and 
securities held by the company, whether or not readily marketable.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to transfers after the date of the enactment of this Act in 
taxable years ending after such date.
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.  Sets forth a special rule for investment companies.
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, and for other purposes.