II 

117TH CONGRESS 

1ST SESSION S. 2621 

To amend the Internal Revenue Code of 1986 to modernize the tax treatment 

of derivatives and their underlying investments, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

AUGUST 5, 2021 

Mr. WYDEN introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to modernize 

the tax treatment of derivatives and their underlying 

investments, and for other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘Modernization of Derivatives Tax Act of 2021’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment 

9 to, or repeal of, a section or other provision, the reference 


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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986. 

3 SEC. 2. MODERNIZATION OF TAX TREATMENT OF CERTAIN 

4 DERIVATIVES. 

5 (a) IN GENERAL.—Subchapter E of chapter 1 is 

6 amended by adding at the end the following new part: 

7 ‘‘PART IV—TAX TREATMENT OF DERIVATIVES 

8 AND SIMILAR CONTRACTS 

‘‘SUBPART A. DERIVATIVES

‘‘SUBPART B. SIMILAR CONTRACTS

9 ‘‘Subpart A—Derivatives 

‘‘Sec. 491. Rules for treatment of derivatives. 

‘‘Sec. 492. Investment hedging units. 

‘‘Sec. 493. Derivative defined. 

10 ‘‘SEC. 491. RULES FOR TREATMENT OF DERIVATIVES. 

11 ‘‘(a) IN GENERAL.—For purposes of this title, if 

12 there is a taxable event with respect to a derivative or an 

13 underlying investment— 

14 ‘‘(1) notwithstanding any other provision of this 

15 title, except as provided in subsection (b)(3)(A) or 

16 section 1032, gain or loss shall be recognized and 

17 taken into account in the taxable year in which the 

18 taxable event occurs, and 

19 ‘‘(2) proper adjustment shall be made in the 

20 amount of any subsequent gain or loss for gain or 

21 loss taken into account by reason of paragraph (1). 


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1 ‘‘(b) RULES RELATING TO GAIN OR LOSS.—Notwith2 standing any other provision of this title— 

3 ‘‘(1) CHARACTER AND SOURCE OF GAIN OR

4 LOSS.— 

5 ‘‘(A) CHARACTER.—Except as provided in 

6 paragraph (3)(A), any item of income, deduc7 tion, gain, or loss taken into account under sub8 section (a) with respect to a taxable event shall 

9 be treated as— 

10 ‘‘(i) ordinary income or loss, and 

11 ‘‘(ii) attributable to a trade or busi12 ness of the taxpayer for purposes of sec13 tions 62(a) and 172(d)(4). 

14 ‘‘(B) SOURCE OF GAIN OR LOSS FROM DE15 RIVATIVES.—In the case of a taxable event with 

16 respect to a derivative, any item of income, de17 duction, gain, or loss taken into account under 

18 subsection (a) shall be treated as derived from 

19 sources within the country of residence, incor20 poration, or organization of the taxpayer. 

21 ‘‘(2) DETERMINATION OF AMOUNT.— 

22 ‘‘(A) IN GENERAL.—The amount of gain 

23 or loss taken into account under subsection (a) 

24 with respect to a taxable event shall be— 


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1 ‘‘(i) in the case of a taxable event in2 volving the termination or transfer of a de3 rivative or the sale or exchange of an un4 derlying investment, the amount of gain or 

5 loss determined under this title with re6 spect to the taxable event, or 

7 ‘‘(ii) in the case of any other taxable 

8 event, the amount of gain or loss which 

9 would be determined under this title if, im10 mediately before the taxable event— 

11 ‘‘(I) in the case of a derivative, 

12 the derivative were terminated or 

13 transferred at its fair market value, or 

14 ‘‘(II) in the case of an underlying 

15 investment, the investment were sold 

16 or exchanged at its fair market value. 

17 ‘‘(B) RELIANCE ON VALUATION.—For pur18 poses of subparagraph (A), the taxpayer may 

19 rely on a valuation which is— 

20 ‘‘(i) provided to the taxpayer by a 

21 broker under section 6045(b), or 

22 ‘‘(ii) determined under an applicable 

23 financial statement. 

24 ‘‘(3) SPECIAL RULES FOR TAXABLE EVENTS

25 WITH RESPECT TO INVESTMENT HEDGING UNITS.— 


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1 ‘‘(A) IN GENERAL.—In the case of a tax2 able event described in subsection (c)(2) with 

3 respect to a derivative or underlying investment 

4 (other than a termination or transfer of the de5 rivative or the sale or exchange of the under6 lying investment)— 

7 ‘‘(i) notwithstanding subsection (a), 

8 built-in loss (if any) with respect to the de9 rivative or underlying investment shall not 

10 be recognized and shall not be taken into 

11 account by reason of such taxable event, 

12 and 

13 ‘‘(ii) notwithstanding paragraph (1), 

14 built-in gain (if any) with respect to the 

15 underlying investment shall be treated as 

16 long-term or short-term capital gain if the 

17 built-in gain would have been so treated if 

18 the investment were sold or exchanged at 

19 its fair market value immediately before 

20 the time that the built-in gain is deter21 mined under subparagraph (D). 

22 ‘‘(B) IDENTIFICATION.—For purposes of 

23 this paragraph, the determination of which por24 tions of an underlying investment have been 

25 deemed sold or exchanged in a taxable event 


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1 shall be made in the same manner as if there 

2 had been an actual sale or exchange. 

3 ‘‘(C) BUILT-IN LOSS.—For purposes of 

4 this section, the term ‘built-in loss’ means, with 

5 respect to any derivative or underlying invest6 ment in an investment hedging unit, any loss 

7 which would have been recognized and taken 

8 into account under subsection (a) if the deriva9 tive were terminated or transferred, or the un10 derlying investment were sold or exchanged, at 

11 its fair market value as of the later of the time 

12 that the investment hedging unit was estab13 lished or the time that the derivative or the un14 derlying investment became part of the invest15 ment hedging unit. 

16 ‘‘(D) BUILT-IN GAIN.—For purposes of 

17 this section, the term ‘built-in gain’ means, with 

18 respect to any underlying investment in an in19 vestment hedging unit, any gain which would 

20 have been recognized and taken into account 

21 under subsection (a) if the underlying invest22 ment were sold or exchanged at its fair market 

23 value as of the later of the time that the invest24 ment hedging unit was established or the time 


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1 that the underlying investment became part of 

2 the investment hedging unit. 

3 ‘‘(c) TAXABLE EVENT.—For purposes of this part, 

4 the term ‘taxable event’ means— 

5 ‘‘(1) with respect to any derivative which is not 

6 part of an investment hedging unit— 

7 ‘‘(A) the termination or transfer of such 

8 derivative, and 

9 ‘‘(B) the close of any taxable year if the 

10 taxpayer has rights or obligations with respect 

11 to such derivative at such time, and 

12 ‘‘(2) with respect to all derivatives and under13 lying investments which are part of the same invest14 ment hedging unit— 

15 ‘‘(A) the establishment of the investment 

16 hedging unit, 

17 ‘‘(B) the termination or transfer of any 

18 such derivative, 

19 ‘‘(C) the sale or exchange of all or any por20 tion of any such underlying investment, 

21 ‘‘(D) the entering into of another deriva22 tive, or the acquisition of an additional amount 

23 of such underlying investment, after the estab24 lishment of the investment hedging unit if such 

25 derivative or additional amount is treated as 


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1 part of the investment hedging unit under sec2 tion 492, and 

3 ‘‘(E) in the case of— 

4 ‘‘(i) an investment hedging unit with 

5 respect to which an election is in effect 

6 under section 492(b), the close of each 

7 business day, and 

8 ‘‘(ii) any other investment hedging 

9 unit, the close of any taxable year if the 

10 applicable hedging period with respect to 

11 such unit includes such close. 

12 ‘‘(3) TERMINATION OR TRANSFER.—For pur13 poses of this part, the term ‘termination or transfer’ 

14 includes, with respect to any derivative, any termi15 nation or transfer by offsetting, by taking or making 

16 delivery, by exercise or being exercised, by assign17 ment or being assigned, by lapse, by sale or other 

18 disposition, by assumption, or otherwise. 

19 ‘‘(d) TREATMENT OF PAYMENTS WITH RESPECT TO

20 CERTAIN DERIVATIVES.—Notwithstanding any other pro21 vision of this title— 

22 ‘‘(1) IN GENERAL.—Except as provided by the 

23 Secretary, in the case of a payment pursuant to a 

24 derivative (other than an option)— 


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1 ‘‘(A) any item of income, deduction, gain, 

2 or loss with respect to the payment shall be 

3 taken into account for purposes of this title at 

4 the time of the payment, and 

5 ‘‘(B) proper adjustment shall be made in 

6 the amount of any subsequent gain or loss for 

7 items taken into account by reason of subpara8 graph (A). 

9 This paragraph shall not apply to a payment in con10 nection with a taxable event. 

11 ‘‘(2) RULES RELATING TO CHARACTER AND

12 SOURCE OF GAIN OR LOSS.—In the case of any item 

13 of income, deduction, gain, or loss with respect to 

14 payments described in paragraph (1)— 

15 ‘‘(A) the rules of subsection (b)(1)(A) shall 

16 apply in determining the character of such 

17 item, and 

18 ‘‘(B) except as provided in section 871(m), 

19 the rule of subsection (b)(1)(B) shall apply in 

20 determining the source of such item. 

21 ‘‘(e) SUSPENSION OF HOLDING PERIOD WHILE UN22 DERLYING INVESTMENT PART OF INVESTMENT HEDGING

23 UNIT.—For purposes of section 1222, in the case of any 

24 underlying investment which is part of an investment 

25 hedging unit, the holding period for such investment shall 


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1 not include any period during which the underlying invest2 ment is part of such unit. 

3 ‘‘(f) APPLICABLE FINANCIAL STATEMENT.—For 

4 purposes of this part, the term ‘applicable financial state5 ment’ means— 

6 ‘‘(1) a financial statement which is certified as 

7 being prepared in accordance with generally accept8 ed accounting principles and which is— 

9 ‘‘(A) a 10–K (or successor form), or an10 nual statement to shareholders, required to be 

11 filed by the taxpayer with the United States Se12 curities and Exchange Commission, 

13 ‘‘(B) an audited financial statement of the 

14 taxpayer which is used for— 

15 ‘‘(i) credit purposes, 

16 ‘‘(ii) reporting to shareholders, part17 ners, or other proprietors, or to bene18 ficiaries, or 

19 ‘‘(iii) any other substantial nontax 

20 purpose, 

21 but only if there is no statement of the taxpayer 

22 described in subparagraph (A), or 

23 ‘‘(C) filed by the taxpayer with any other 

24 Federal agency for purposes other than Federal 

25 tax purposes, but only if there is no statement 


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1 of the taxpayer described in subparagraph (A) 

2 or (B), 

3 ‘‘(2) a financial statement which is made on the 

4 basis of international financial reporting standards 

5 and is filed by the taxpayer with an agency of a for6 eign government which is equivalent to the United 

7 States Securities and Exchange Commission and 

8 which has reporting standards not less stringent 

9 than the standards required by such Commission, 

10 but only if there is no statement of the taxpayer de11 scribed in paragraph (1), or 

12 ‘‘(3) a financial statement filed by the taxpayer 

13 with any other regulatory or governmental body 

14 specified by the Secretary, but only if there is no 

15 statement of the taxpayer described in paragraph 

16 (1) or (2). 

17 ‘‘SEC. 492. INVESTMENT HEDGING UNITS. 

18 ‘‘(a) INVESTMENT HEDGING UNIT.—For purposes of 

19 this part— 

20 ‘‘(1) IN GENERAL.—Except as provided in sub21 section (b)— 

22 ‘‘(A) a taxpayer shall be treated as having 

23 an investment hedging unit with respect to an 

24 underlying investment during any applicable 


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1 hedging period with respect to the underlying 

2 investment, and 

3 ‘‘(B) subject to paragraph (3), such invest4 ment hedging unit shall at any time during the 

5 applicable hedging period consist of the fol6 lowing held by the taxpayer at such time: 

7 ‘‘(i) Each derivative with respect to 

8 the underlying investment which has a 

9 delta with respect to any portion of the un10 derlying investment which is within the 

11 range beginning with minus 0.7 and end12 ing with minus 1.0. 

13 ‘‘(ii) Each portion of the underlying 

14 investment described in clause (i) with re15 spect to which any derivative has a delta 

16 within the range described in clause (i). 

17 ‘‘(2) APPLICABLE HEDGING PERIOD.—The term 

18 ‘applicable hedging period’ means, with respect to 

19 any underlying investment of a taxpayer, a contin20 uous period— 

21 ‘‘(A) beginning with the first time (after a 

22 period which is not an applicable hedging pe23 riod) the taxpayer holds 1 or more of the de24 rivatives with respect to the underlying invest25 ment, and 1 or more portions of the underlying 


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1 investment, which are described in paragraph 

2 (1)(B), and 

3 ‘‘(B) ending with the time none of such de4 rivatives and portions are so described. 

5 ‘‘(3) SPECIAL RULES RELATING TO DELTA AND

6 COMBINING DERIVATIVES.— 

7 ‘‘(A) IN GENERAL.—For purposes of this 

8 subsection— 

9 ‘‘(i) a derivative with respect to an 

10 underlying investment shall be treated as 

11 having a delta within the range described 

12 in paragraph (1)(B)(i) if the derivative by 

13 itself, or in combination with 1 or more 

14 other derivatives, has such delta with re15 spect to any portion of such underlying in16 vestment, and 

17 ‘‘(ii) the determination under para18 graph (1)(B) of which derivatives have 

19 such delta, and each portion of the under20 lying investment with respect to which 

21 such derivatives have such delta, shall be 

22 made in the manner which results in the 

23 largest portion of such underlying invest24 ment being so described. 


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1 ‘‘(B) SECRETARIAL AUTHORITY FOR AP2 PLICABLE TRADED DERIVATIVES.—The Sec3 retary may prescribe regulations or other guid4 ance to modify the rules under subparagraph 

5 (A) to simplify the application of such rules to 

6 applicable traded derivatives. 

7 ‘‘(4) APPLICABLE TRADED DERIVATIVES.—For 

8 purposes of paragraph (3)— 

9 ‘‘(A) IN GENERAL.—The term ‘applicable 

10 traded derivative’ means any listed option or 

11 regulated futures contract. 

12 ‘‘(B) REGULATED FUTURES CONTRACT.— 

13 The term ‘regulated futures contract’ means a 

14 contract— 

15 ‘‘(i) with respect to which the amount 

16 required to be deposited and the amount 

17 which may be withdrawn depends on a sys18 tem of marking to market, and 

19 ‘‘(ii) which is traded on (or subject to 

20 the rules of) a qualified board or exchange. 

21 ‘‘(C) LISTED OPTION.—The term ‘listed 

22 option’ means any option (other than a right to 

23 acquire stock from the issuer) which is traded 

24 on (or subject to the rules of) a qualified board 

25 or exchange. 


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1 ‘‘(D) QUALIFIED BOARD OR EXCHANGE.— 

2 The term ‘qualified board or exchange’ 

3 means— 

4 ‘‘(i) a national securities exchange 

5 which is registered with the Securities and 

6 Exchange Commission, 

7 ‘‘(ii) a domestic board of trade des8 ignated as a contract market by the Com9 modity Futures Trading Commission, or 

10 ‘‘(iii) any other exchange, board of 

11 trade, or other market which the Secretary 

12 determines has rules adequate to carry out 

13 the purposes of this part. 

14 ‘‘(b) ELECTION WITH RESPECT TO ITEMS INCLUDED

15 IN INVESTMENT HEDGING UNIT.— 

16 ‘‘(1) IN GENERAL.—For purposes of this part, 

17 a taxpayer may elect to treat all derivatives with re18 spect to an underlying investment, and all of such 

19 underlying investment, as part of an investment 

20 hedging unit. 

21 ‘‘(2) ELECTION.—Any election under this sub22 section with respect to an underlying investment— 

23 ‘‘(A) shall apply to all derivatives with re24 spect to such underlying investment, and all of 

25 such underlying investment, held at any time 


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1 after the election is made (including during any 

2 period such derivatives or underlying invest3 ment are not held simultaneously), and 

4 ‘‘(B) shall be irrevocable. 

5 ‘‘(3) DEEMED ELECTION FOR TAXPAYERS FAIL6 ING TO IDENTIFY.— 

7 ‘‘(A) IN GENERAL.—If a taxpayer— 

8 ‘‘(i) does not have an election in effect 

9 under paragraph (1) with respect to an un10 derlying investment, and 

11 ‘‘(ii) fails to meet the requirements of 

12 subsection (c) for testing and identifying 

13 derivatives with respect to the underlying 

14 investment, 

15 the taxpayer shall be treated as having made 

16 the election under paragraph (1). 

17 ‘‘(B) TREATMENT OF ELECTION.—For 

18 purposes of paragraph (2), a deemed election 

19 under this paragraph— 

20 ‘‘(i) shall be treated as made as of the 

21 first time the taxpayer fails to meet the re22 quirements of subsection (c) with respect 

23 to the underlying investment, and 


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1 ‘‘(ii) notwithstanding paragraph 

2 (2)(B), may be revoked with the consent of 

3 the Secretary. 

4 ‘‘(c) DEFINITIONS AND RULES RELATING TO TAX5 PAYERS IDENTIFYING INVESTMENT HEDGING UNITS.—In 

6 the case of a taxpayer with respect to which an election 

7 is not in effect under subsection (b) with respect to an 

8 underlying investment— 

9 ‘‘(1) IN GENERAL.—The taxpayer shall, at the 

10 times described in paragraph (3), test the derivatives 

11 with respect to the underlying investment and make 

12 the identifications described in paragraph (2). 

13 ‘‘(2) IDENTIFICATION.— 

14 ‘‘(A) IN GENERAL.—The taxpayer shall 

15 identify the following with respect to an under16 lying investment: 

17 ‘‘(i) Each derivative described in sub18 section (a)(1)(B)(i). 

19 ‘‘(ii) Each portion of the underlying 

20 investment described in subsection 

21 (a)(1)(B)(ii). 

22 ‘‘(B) DERIVATIVES AND UNDERLYING IN23 VESTMENT NOT PART OF INVESTMENT HEDG24 ING UNIT.—A taxpayer shall identify the de25 rivatives with respect to an underlying investVerDate Sep 11 2014 15:55 Aug 06, 2021 Jkt 019200 PO 00000 Frm 00017 Fmt 6652 Sfmt 6201 E:\BILLS\S2621.IS S2621

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1 ment, and the portions of the underlying invest2 ment, which are not required to be identified 

3 under subparagraph (A). 

4 ‘‘(C) PORTION MAY INCLUDE ALL OF UN5 DERLYING INVESTMENT.—For purposes of this 

6 part, the term ‘portion’ with respect to any un7 derlying investment identified may include all of 

8 the underlying investment. 

9 ‘‘(3) TIMES IDENTIFICATIONS REQUIRED TO BE

10 MADE.— 

11 ‘‘(A) IN GENERAL.—The taxpayer shall 

12 test and make the identifications required 

13 under this subsection at the following times 

14 during any continuous period the taxpayer si15 multaneously holds 1 or more derivatives with 

16 respect to an underlying investment and 1 or 

17 more portions of the underlying investment: 

18 ‘‘(i) The beginning of the period. 

19 ‘‘(ii) Immediately after the taxpayer 

20 (during such period)— 

21 ‘‘(I) enters into another deriva22 tive with respect to the underlying in23 vestment or acquires an additional 

24 amount of such underlying invest25 ment, or 


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1 ‘‘(II) terminates or transfers 1 or 

2 more derivatives with respect to the 

3 underlying investment or sells or ex4 changes any portion of the underlying 

5 investment, except that no testing and 

6 identification shall be required under 

7 this subclause with respect to any 

8 such transaction if the taxpayer does 

9 not have an investment hedging unit 

10 with respect to the underlying invest11 ment immediately before such trans12 action. 

13 ‘‘(iii) Such other times during such 

14 period as the Secretary may prescribe by 

15 regulations or other guidance. 

16 ‘‘(B) NO OTHER TIMES FOR TESTING.— 

17 Except as provided by the Secretary, there shall 

18 not be taken into account for purposes of this 

19 part any testing and identification done by the 

20 taxpayer with respect to an underlying invest21 ment at a time other than the times required 

22 under subparagraph (A). 

23 ‘‘(4) MANNER.—A taxpayer shall be treated as 

24 timely making the identifications required under this 

25 subsection if the derivatives with respect to, and 


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1 each portion of, an underlying investment are clearly 

2 identified as part of (or as not part of) the invest3 ment hedging unit for purposes of this paragraph 

4 before the close of the day on which the identifica5 tion is required (or such other time as the Secretary 

6 may prescribe). 

7 ‘‘(5) TREATMENT OF INCORRECT IDENTIFICA8 TION.—The Secretary shall prescribe regulations or 

9 other guidance to properly characterize any income, 

10 gain, expense, or loss arising from any derivative or 

11 underlying investment which is incorrectly identified 

12 under paragraph (2) as being part of, or not being 

13 part of, an investment hedging unit. 

14 ‘‘(d) DELTA.—For purposes of this section— 

15 ‘‘(1) IN GENERAL.—The term ‘delta’ means, 

16 with respect to any derivative and underlying invest17 ment, the ratio of the expected change in the fair 

18 market value of the derivative to a very small change 

19 in the fair market value of the underlying invest20 ment. 

21 ‘‘(2) METHOD OF DETERMINATION.—The delta 

22 with respect to any derivative with respect to an un23 derlying investment (or any combination of such de24 rivatives) shall be determined— 


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1 ‘‘(A) in a commercially reasonable manner, 

2 and 

3 ‘‘(B) except as provided by the Secretary, 

4 in a manner which is consistent with the man5 ner used by the taxpayer or the taxpayer’s 

6 broker for purposes of an applicable financial 

7 statement. 

8 ‘‘(3) TIME FOR MAKING DETERMINATION.—The 

9 delta with respect to any derivative and underlying 

10 investment shall be determined as of any date the 

11 taxpayer is required to make the identifications de12 scribed in subsection (c). 

13 ‘‘(4) MULTIPLE UNDERLYING INVESTMENTS.— 

14 ‘‘(A) IN GENERAL.—Except as provided in 

15 subparagraph (B), if the value of a derivative is 

16 determined by reference to more than 1 under17 lying investment, the delta shall be determined 

18 separately with respect to each underlying in19 vestment. 

20 ‘‘(B) METHODS FOR COMBINATIONS OF

21 UNDERLYING INVESTMENTS.—The Secretary 

22 may provide methods for determining the delta 

23 of any derivative with respect to combinations 

24 of 2 or more underlying investments. 


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1 ‘‘(e) OTHER DEFINITIONS AND RULES.—For pur2 poses of this part— 

3 ‘‘(1) UNDERLYING INVESTMENT.— 

4 ‘‘(A) IN GENERAL.—The term ‘underlying 

5 investment’ means, with respect to any deriva6 tive, any item— 

7 ‘‘(i) which is described in any of the 

8 paragraphs (1) through (8) of section 

9 493(a) (or any item substantially the same 

10 as any such item), and 

11 ‘‘(ii) by reference to which the value 

12 of the derivative, or any payment or other 

13 transfer with respect to the derivative, is 

14 determined either directly or indirectly. 

15 ‘‘(B) COORDINATION WITH SECTION 475.— 

16 In the case of a dealer in securities to which 

17 section 475 applies (and a dealer in commod18 ities with respect to which an election is in ef19 fect under section 475(e)), such term shall not 

20 include any item which, but for this subpara21 graph, would be treated as an underlying in22 vestment if such item is treated as a security 

23 under section 475 (including a commodity 

24 treated as a security under section 475(e)). 


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1 ‘‘(C) INDIRECT DETERMINATIONS.—For 

2 purposes of subparagraph (A)(ii), the value of, 

3 or any payment or other transfer with respect 

4 to, a derivative shall not be treated as indirectly 

5 determined by reference to one or more of the 

6 items described in paragraphs (1) through (8) 

7 of section 493(a) solely because the change in 

8 a variable affecting such value, payment, or 

9 other transfer also affects the value, level, 

10 amount, or calculation of such item or items. 

11 ‘‘(2) ESTABLISHMENT OF INVESTMENT HEDG12 ING UNIT.—A taxpayer shall be treated as having 

13 established an investment hedging unit with respect 

14 to an underlying investment— 

15 ‘‘(A) in the case of a taxpayer with an 

16 election in effect under subsection (b) with re17 spect to the underlying investment, as of the 

18 date the election takes effect, and 

19 ‘‘(B) in the case of any other taxpayer, as 

20 of the beginning of each applicable hedging pe21 riod with respect to the underlying investment. 

22 ‘‘(3) RELATED PARTIES, ETC.—For purposes of 

23 this section— 

24 ‘‘(A) ATTRIBUTION BETWEEN RELATED

25 PERSONS.—Any derivative or underlying investVerDate Sep 11 2014 15:55 Aug 06, 2021 Jkt 019200 PO 00000 Frm 00023 Fmt 6652 Sfmt 6201 E:\BILLS\S2621.IS S2621

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1 ment held by a related party (within the mean2 ing of subsection (f)) with respect to the tax3 payer shall be treated as held by the taxpayer. 

4 ‘‘(B) CERTAIN PASS-THROUGH ENTI5 TIES.—If part or all of the income, gain, loss, 

6 or expense with respect to a derivative or un7 derlying investment held by a partnership, 

8 trust, or other entity would properly be taken 

9 into account for purposes of this chapter by the 

10 taxpayer, then, except to the extent otherwise 

11 provided by the Secretary, such derivative or in12 vestment shall be treated as held by the tax13 payer. 

14 ‘‘(C) STOCK AND DEBT WHOSE VALUE PRI15 MARILY DETERMINED BY REFERENCE TO

16 OTHER ITEMS.—Except as provided by the Sec17 retary, if the taxpayer holds an item described 

18 in paragraph (1) or (3) of section 493(a) the 

19 value of which, or with respect to which any 

20 payment or other transfer, is primarily deter21 mined by reference to one or more other items 

22 described in paragraphs (1) through (8) of sec23 tion 493(a), then, solely for purposes of this 

24 subpart, such item described in paragraph (1) 


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1 or (3) of section 493(a) shall also be treated as 

2 if it were such other item. 

3 ‘‘(f) RELATED PARTY.—For purposes of this sec4 tion— 

5 ‘‘(1) IN GENERAL.—A person is a related party 

6 to the taxpayer if, with respect to any period during 

7 which a derivative or underlying investment is held 

8 by such person, such person— 

9 ‘‘(A) is the taxpayer’s spouse, 

10 ‘‘(B) is a dependent of the taxpayer or any 

11 other taxpayer with respect to whom the tax12 payer is a dependent, 

13 ‘‘(C) is an individual, corporation, partner14 ship, trust, or estate which controls, or is con15 trolled by (within the meaning of section 

16 954(d)(3)), the taxpayer or any individual de17 scribed in subparagraph (A) or (B) with respect 

18 to the taxpayer (or any combination thereof), 

19 ‘‘(D) is an individual retirement plan, Ar20 cher MSA (as defined in section 220(d)), or 

21 health savings account (as defined in section 

22 223(d)), of the taxpayer or of any individual de23 scribed in subparagraph (A) or (B) with respect 

24 to the taxpayer, 


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•S 2621 IS

1 ‘‘(E) is an account under a qualified tui2 tion program described in section 529, an 

3 ABLE account (as defined in section 

4 529A(e)(6)), or a Coverdell education savings 

5 account (as defined in section 530(b)) if the 

6 taxpayer, or any individual described in sub7 paragraph (A) or (B) with respect to the tax8 payer, is the designated beneficiary of such ac9 count or has the right to make any decision 

10 with respect to the investment of any amount in 

11 such account, 

12 ‘‘(F) is an account under— 

13 ‘‘(i) a plan described in section 

14 401(a), 

15 ‘‘(ii) an annuity plan described in sec16 tion 403(a), 

17 ‘‘(iii) an annuity contract described in 

18 section 403(b), or 

19 ‘‘(iv) an eligible deferred compensa20 tion plan described in section 457(b) and 

21 maintained by an employer described in 

22 section 457(e)(1)(A), 

23 if the taxpayer or any individual described in 

24 subparagraph (A) or (B) with respect to the 

25 taxpayer has the right to make any decision 


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•S 2621 IS

1 with respect to the investment of any amount in 

2 such account, or 

3 ‘‘(G) files a consolidated return (within the 

4 meaning of section 1501) with the taxpayer for 

5 any taxable year which includes a portion of 

6 such period. 

7 ‘‘(2) DETERMINATION OF MARITAL STATUS.— 

8 ‘‘(A) IN GENERAL.—Except as provided in 

9 subparagraph (B), marital status shall be deter10 mined under section 7703. 

11 ‘‘(B) SPECIAL RULE FOR MARRIED INDI12 VIDUALS FILING SEPARATELY AND LIVING

13 APART.—A husband and wife who— 

14 ‘‘(i) file separate returns for any tax15 able year, and 

16 ‘‘(ii) live apart at all times during 

17 such taxable year, 

18 shall not be treated as married individuals. 

19 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

20 such regulations or other guidance as may be appropriate 

21 to carry out this section, including regulations or guidance 

22 which require in appropriate cases a taxpayer to bifurcate 

23 derivatives described in subsection (d)(4) for purposes of 

24 applying this part or which may be necessary to prevent 

25 the avoidance of the purposes of subsection (f) (including 


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•S 2621 IS

1 treating persons as related parties if such persons are 

2 formed or availed of to avoid the purposes of such sub3 section). 

4 ‘‘SEC. 493. DERIVATIVE DEFINED. 

5 ‘‘(a) IN GENERAL.—For purposes of this part, except 

6 as otherwise provided in this section, the term ‘derivative’ 

7 means any contract (including any option, forward con8 tract, futures contract, short position, swap, or similar 

9 contract) the value of which, or any payment or other 

10 transfer with respect to which, is (directly or indirectly) 

11 determined by reference to one or more of the following: 

12 ‘‘(1) Any share of stock in a corporation. 

13 ‘‘(2) Any partnership or beneficial ownership 

14 interest in a partnership or trust. 

15 ‘‘(3) Any evidence of indebtedness. 

16 ‘‘(4) Except as provided in subsection (b)(1), 

17 any real property. 

18 ‘‘(5) Any commodity which is actively traded 

19 (within the meaning of section 1092(c)(4)). 

20 ‘‘(6) Any currency. 

21 ‘‘(7) Any rate, price, amount, index, formula, or 

22 algorithm. 

23 ‘‘(8) Any other item which the Secretary may 

24 prescribe. 


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•S 2621 IS

1 Except as provided by the Secretary to prevent the avoid2 ance of the purposes of this part, such term shall not in3 clude any item described in paragraphs (1) through (8). 

4 For purposes of this subsection, the value of, or any pay5 ment or other transfer with respect to, a contract shall 

6 not be treated as indirectly determined by reference to one 

7 or more of the items described in paragraphs (1) through 

8 (8) solely because the change in a variable affecting such 

9 value, payment, or other transfer also affects the value, 

10 level, amount, or calculation of such item or items. 

11 ‘‘(b) EXCEPTIONS.— 

12 ‘‘(1) CERTAIN REAL PROPERTY.— 

13 ‘‘(A) IN GENERAL.—For purposes of this 

14 part, the term ‘derivative’ shall not include any 

15 contract with respect to interests in real prop16 erty (as defined in section 856(c)(5)(C)) if such 

17 contract requires physical delivery of such real 

18 property. 

19 ‘‘(B) OPTIONS TO SETTLE IN CASH.— 

20 ‘‘(i) IN GENERAL.—For purposes of 

21 subparagraph (A), a contract which pro22 vides for an option of cash settlement shall 

23 not be treated as requiring physical deliv24 ery of real property unless the option is exVerDate Sep 11 2014 15:55 Aug 06, 2021 Jkt 019200 PO 00000 Frm 00029 Fmt 6652 Sfmt 6201 E:\BILLS\S2621.IS S2621

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•S 2621 IS

1 ercisable only in unusual and exceptional 

2 circumstances. 

3 ‘‘(ii) OPTION OF CASH SETTLE4 MENT.—For purposes of clause (i), a con5 tract provides an option of cash settlement 

6 if the contract settles in (or could be set7 tled in) cash or property other than the 

8 underlying real property. 

9 ‘‘(2) HEDGING TRANSACTIONS.— 

10 ‘‘(A) IN GENERAL.—For purposes of this 

11 part, the term ‘derivative’ shall not include any 

12 contract which is part of a hedging transaction 

13 (as defined in section 1221(b)). 

14 ‘‘(B) SECTION 988 HEDGING TRANS15 ACTIONS.—For exception for section 988 hedg16 ing transactions, see section 988(d)(1). 

17 ‘‘(3) SECURITIES LENDING, SALE-REPURCHASE, 

18 AND SIMILAR FINANCING TRANSACTIONS.—To the 

19 extent provided by the Secretary, for purposes of 

20 this part, the term ‘derivative’ shall not include the 

21 right to the return of the same or substantially iden22 tical securities transferred in a securities lending 

23 transaction, sale-repurchase transaction, or similar 

24 financing transaction. 


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•S 2621 IS

1 ‘‘(4) OPTIONS RECEIVED IN CONNECTION WITH

2 THE PERFORMANCE OF SERVICES.—For purposes of 

3 this part, the term ‘derivative’ shall not include any 

4 option described in section 83(e)(3) received in con5 nection with the performance of services. 

6 ‘‘(5) INSURANCE, ANNUITY, AND ENDOWMENT

7 CONTRACTS.—For purposes of this part, the term 

8 ‘derivative’ shall not include any insurance, annuity, 

9 or endowment contract issued by an insurance com10 pany to which subchapter L applies (or issued by 

11 any foreign corporation to which such subchapter 

12 would apply if such foreign corporation were a do13 mestic corporation). 

14 ‘‘(6) DERIVATIVES WITH RESPECT TO STOCK

15 OF MEMBERS OF SAME WORLDWIDE AFFILIATED

16 GROUP.— 

17 ‘‘(A) IN GENERAL.—For purposes of this 

18 part, the term ‘derivative’ shall not include any 

19 derivative (determined without regard to this 

20 paragraph) with respect to stock issued by any 

21 member of the same worldwide affiliated group 

22 in which the taxpayer is a member. 

23 ‘‘(B) WORLDWIDE AFFILIATED GROUP.— 

24 For purposes of this paragraph, the term 


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•S 2621 IS

1 ‘worldwide affiliated group’ means a group con2 sisting of— 

3 ‘‘(i) the includible members of an af4 filiated group (as defined in section 

5 1504(a), determined without regard to 

6 paragraph (2) of section 1504(b)), and 

7 ‘‘(ii) all controlled foreign corpora8 tions in which such members in the aggre9 gate meet the ownership requirements of 

10 section 1504(a)(2) either directly or indi11 rectly through applying paragraph (2) of 

12 section 958(a) or through applying rules 

13 similar to the rules of such paragraph to 

14 stock owned directly or indirectly by do15 mestic partnerships, trusts, or estates. 

16 ‘‘(7) COMMODITIES USED IN NORMAL COURSE

17 OF TRADE OR BUSINESS.—For purposes of this part, 

18 the term ‘derivative’ shall not include any contract 

19 with respect to any commodity if— 

20 ‘‘(A) such contract requires physical deliv21 ery with the option of cash settlement only in 

22 unusual and exceptional circumstances, and 

23 ‘‘(B) such commodity is used (and is used 

24 in quantities with respect to which such deriva25 tive relates) in the normal course of the taxVerDate Sep 11 2014 15:55 Aug 06, 2021 Jkt 019200 PO 00000 Frm 00032 Fmt 6652 Sfmt 6201 E:\BILLS\S2621.IS S2621

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•S 2621 IS

1 payer’s trade or business (or, in the case of an 

2 individual, for personal consumption). 

3 ‘‘(c) CONTRACTS WITH EMBEDDED DERIVATIVE

4 COMPONENTS.— 

5 ‘‘(1) IN GENERAL.—If a contract has derivative 

6 and nonderivative components, then each derivative 

7 component shall be treated as a derivative for pur8 poses of this part. If the derivative component can9 not be separately valued, then the entire contract 

10 shall be treated as a derivative for purposes of this 

11 part. 

12 ‘‘(2) EXCEPTION FOR CERTAIN EMBEDDED DE13 RIVATIVE COMPONENTS OF DEBT INSTRUMENTS.—A 

14 debt instrument shall not be treated as having a de15 rivative component merely because— 

16 ‘‘(A) such debt instrument is denominated 

17 in a nonfunctional currency (as defined in sec18 tion 988(c)(1)(C)(ii)), or 

19 ‘‘(B) payments with respect to such debt 

20 instrument are determined by reference to the 

21 value of a nonfunctional currency (as so de22 fined). 

23 ‘‘(d) TREATMENT OF AMERICAN DEPOSITORY RE24 CEIPTS AND SIMILAR INSTRUMENTS.—Except as other25 wise provided by the Secretary, for purposes of this part, 


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•S 2621 IS

1 American depository receipts (and similar instruments) 

2 with respect to shares of stock in foreign corporations 

3 shall be treated as shares of stock in such foreign corpora4 tions. 

5 ‘‘Subpart B—Similar Contracts 

‘‘Sec. 494. Tax treatment of contracts similar to derivatives. 

6 ‘‘SEC. 494. TAX TREATMENT OF CONTRACTS SIMILAR TO 

7 DERIVATIVES. 

8 ‘‘(a) IN GENERAL.—For purposes of this title, if 

9 there is a taxable transaction with respect to any applica10 ble property interest, then, notwithstanding any other pro11 vision of this title other than section 1032, gain or loss 

12 attributable to the taxable transaction shall be considered 

13 gain or loss from the sale or exchange of property which 

14 has the same character as the property to which the appli15 cable property interest relates has (or would have) in the 

16 hands of the taxpayer. 

17 ‘‘(b) DEFINITIONS.—For purposes of this section— 

18 ‘‘(1) APPLICABLE PROPERTY INTEREST.—The 

19 term ‘applicable property interest’ means any right 

20 or obligation with respect to property other than— 

21 ‘‘(A) a derivative (as defined in section 

22 493), or 

23 ‘‘(B) any position in applicable property to 

24 which section 1092 applies. 


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•S 2621 IS

1 ‘‘(2) TAXABLE TRANSACTION.—The term ‘tax2 able transaction’ means, with respect to any applica3 ble property interest— 

4 ‘‘(A) any termination or transfer (as de5 fined in section 491(c)(3)) of such interest, or 

6 ‘‘(B) any payment in fulfillment or partial 

7 fulfillment of such interest.’’. 

8 SEC. 3. COORDINATION OF NEW RULES WITH EXISTING 

9 RULES. 

10 (a) COORDINATION WITH RULES FOR DEALERS AND

11 TRADERS.— 

12 (1) DERIVATIVES NOT TREATED AS SECURI13 TIES.—Section 475(c)(2) is amended— 

14 (A) by adding ‘‘and’’ at the end of sub15 paragraph (C), 

16 (B) by striking subparagraphs (D) and (E) 

17 and by redesignating subparagraph (F) as sub18 paragraph (D), 

19 (C) by striking ‘‘subparagraph (A), (B), 

20 (C), (D), or (E)’’ in subparagraph (D)(i), as so 

21 redesignated, and inserting ‘‘subparagraph (A), 

22 (B), or (C)’’, and 

23 (D) by amending the last sentence to read 

24 as follows: ‘‘Such term shall not include any de25 rivative to which section 491(a) applies.’’. 


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•S 2621 IS

1 (2) DERIVATIVES NOT TREATED AS COMMOD2 ITIES.—Section 475(e)(2) is amended— 

3 (A) by adding ‘‘and’’ at the end of sub4 paragraph (A), 

5 (B) by striking subparagraphs (B) and (C) 

6 and by redesignating subparagraph (D) as sub7 paragraph (B), and 

8 (C) by striking ‘‘subparagraph (A), (B) or 

9 (C)’’ in subparagraph (B)(i), as so redesig10 nated, and inserting ‘‘subparagraph (A)’’. 

11 (3) CONFORMING AMENDMENTS.— 

12 (A) Section 475(b) is amended by striking 

13 paragraph (4). 

14 (B) Section 475(d)(2)(B) is amended— 

15 (i) by striking ‘‘subsection 

16 (c)(2)(F)(iii)’’ and inserting ‘‘subsection 

17 (c)(2)(D)(iii)’’, and 

18 (ii) by striking ‘‘subsection (c)(2)(F)’’ 

19 and inserting ‘‘subsection (c)(2)(D)’’. 

20 (C) Section 475(f)(1)(D) is amended by 

21 striking ‘‘subsections (b)(4) and (d)’’ and in22 serting ‘‘subsection (d)’’. 

23 (b) COORDINATION WITH STRADDLE RULES.— 

24 (1) IN GENERAL.—Section 1092 is amended to 

25 read as follows: 


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•S 2621 IS

1 ‘‘SEC. 1092. STRADDLES. 

2 ‘‘(a) RECOGNITION OF LOSS IN CASE OF STRAD3 DLES, ETC.— 

4 ‘‘(1) LIMITATION ON RECOGNITION OF LOSS.— 

5 ‘‘(A) IN GENERAL.—Any loss with respect 

6 to 1 or more positions shall be taken into ac7 count for any taxable year only to the extent 

8 that the amount of such loss exceeds the unrec9 ognized gain (if any) with respect to 1 or more 

10 positions which were offsetting positions with 

11 respect to 1 or more positions from which the 

12 loss arose. 

13 ‘‘(B) CARRYOVER OF LOSS.—Any loss 

14 which may not be taken into account under 

15 subparagraph (A) for any taxable year shall, 

16 subject to the limitations under subparagraph 

17 (A), be treated as sustained in the succeeding 

18 taxable year. 

19 ‘‘(2) UNRECOGNIZED GAIN.—For purposes of 

20 this subsection— 

21 ‘‘(A) IN GENERAL.—The term ‘unrecog22 nized gain’ means— 

23 ‘‘(i) in the case of any position held 

24 by the taxpayer as of the close of the tax25 able year, the amount of gain which would 

26 be taken into account with respect to such 


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•S 2621 IS

1 position if such position were sold on the 

2 last business day of such taxable year at 

3 its fair market value, and 

4 ‘‘(ii) in the case of any position with 

5 respect to which, as of the close of the tax6 able year, gain has been realized but not 

7 recognized, the amount of gain so realized. 

8 ‘‘(B) REPORTING OF GAIN.—Each tax9 payer shall disclose to the Secretary, at such 

10 time and in such manner and form as the Sec11 retary may prescribe— 

12 ‘‘(i) each position (whether or not 

13 part of a straddle) with respect to which, 

14 as of the close of the taxable year, there is 

15 unrecognized gain, and 

16 ‘‘(ii) the amount of such unrecognized 

17 gain. 

18 The Secretary may waive the requirement to re19 port under this subparagraph with respect to 

20 any position if such reporting is not required to 

21 carry out the purposes of this section. 

22 ‘‘(3) SPECIAL RULES FOR PHYSICALLY SET23 TLED POSITIONS.—For purposes of this subsection, 

24 if a taxpayer settles a position which is part of a 

25 straddle by delivering property to which the position 


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•S 2621 IS

1 relates (and such position, if terminated, would re2 sult in a realization of a loss), then such taxpayer 

3 shall be treated as if such taxpayer— 

4 ‘‘(A) terminated the position for its fair 

5 market value immediately before the settlement, 

6 and 

7 ‘‘(B) sold the property so delivered by the 

8 taxpayer at its fair market value. 

9 ‘‘(b) REGULATIONS.—The Secretary shall prescribe 

10 such regulations with respect to gain or loss on positions 

11 which are a part of a straddle as may be appropriate to 

12 carry out the purposes of this section and section 263(g). 

13 To the extent consistent with such purposes, such regula14 tions shall include rules applying the principles of sub15 sections (a) and (d) of section 1091 and of subsections 

16 (b) and (d) of section 1233 (as in effect before their re17 peal). 

18 ‘‘(c) DEFINITIONS AND RULES RELATING TO STRAD19 DLES.—For purposes of this section— 

20 ‘‘(1) STRADDLE DEFINED.—The term ‘straddle’ 

21 means offsetting positions with respect to applicable 

22 property. 

23 ‘‘(2) OFFSETTING POSITIONS.—A taxpayer 

24 holds offsetting positions with respect to applicable 

25 property if the taxpayer holds any position which by 


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•S 2621 IS

1 itself, or in combination with 1 or more other posi2 tions held by the taxpayer, has a delta (within the 

3 meaning of section 492(d)(1)) with respect to any 

4 other position held by the taxpayer which is within 

5 the range beginning with minus 0.7 and ending with 

6 minus 1.0. For purposes of this paragraph, positions 

7 shall be taken into account whether or not they are 

8 in the same applicable property. 

9 ‘‘(3) DETERMINATION OF DELTA.—For pur10 poses of this section— 

11 ‘‘(A) METHOD OF DETERMINATION.—The 

12 delta with respect to any position in applicable 

13 property with respect to another position in ap14 plicable property (or any combination of such 

15 positions) shall be determined in the same man16 ner as under section 492(d)(2). 

17 ‘‘(B) TIMING OF DELTA DETERMINATION

18 AND OTHER SPECIAL RULES.—Rules similar to 

19 the rules of paragraphs (3) and (4) of section 

20 492(d) shall apply for purposes of this para21 graph. 

22 ‘‘(4) APPLICABLE PROPERTY AND POSITION DE23 FINED.— 

24 ‘‘(A) APPLICABLE PROPERTY.—The term 

25 ‘applicable property’ means any item which is— 


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•S 2621 IS

1 ‘‘(i) described in paragraph (1), (2), 

2 (3), (5), (6), (7), or (8) of section 493(a) 

3 (or any item substantially the same as any 

4 such item), and 

5 ‘‘(ii) of a type which is actively trad6 ed. 

7 ‘‘(B) POSITION.— 

8 ‘‘(i) IN GENERAL.—The term ‘posi9 tion’ means an interest in applicable prop10 erty. 

11 ‘‘(ii) DERIVATIVES EXCLUDED.—Such 

12 term shall not include a derivative (as de13 fined in section 493). 

14 ‘‘(C) STOCK AND DEBT WHOSE VALUE PRI15 MARILY DETERMINED BY REFERENCE TO

16 OTHER ITEMS.—Except as provided in regula17 tions, if the taxpayer holds an item described in 

18 paragraph (1) or (3) of section 493(a) the value 

19 of which, or with respect to which any payment 

20 or other transfer, is primarily determined by 

21 reference to one or more other items described 

22 in paragraphs (1) through (8) of section 

23 493(a), then, solely for purposes of this section, 

24 such item described in paragraph (1) or (3) of 


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•S 2621 IS

1 section 493(a) shall also be treated as if it were 

2 such other item. 

3 ‘‘(5) POSITIONS HELD BY RELATED PERSONS, 

4 ETC.— 

5 ‘‘(A) IN GENERAL.—In determining wheth6 er 2 or more positions are offsetting, the tax7 payer shall be treated as holding any position 

8 held by a related party (within the meaning of 

9 section 492(f)). 

10 ‘‘(B) CERTAIN PASS-THROUGH ENTI11 TIES.—If part or all of the gain or loss with re12 spect to a position held by a partnership, trust, 

13 or other entity would properly be taken into ac14 count for purposes of this chapter by a tax15 payer, then, except to the extent otherwise pro16 vided by the Secretary, such position shall be 

17 treated as held by the taxpayer. 

18 ‘‘(6) SPECIAL RULES FOR FOREIGN CUR19 RENCY.— 

20 ‘‘(A) POSITION TO INCLUDE INTEREST IN

21 CERTAIN DEBT.—For purposes of paragraph 

22 (4)(B)(i), an obligor’s interest in a nonfunc23 tional currency denominated debt obligation is 

24 treated as a position in the nonfunctional cur25 rency. 


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•S 2621 IS

1 ‘‘(B) ACTIVELY TRADED REQUIREMENT.— 

2 For purposes of paragraph (4)(A)(ii), foreign 

3 currency for which there is an active interbank 

4 market is presumed to be actively traded. 

5 ‘‘(d) EXCEPTION FOR HEDGING TRANSACTIONS AND

6 INVESTMENT HEDGING UNITS.—This section shall not 

7 apply in the case of— 

8 ‘‘(1) any hedging transaction (as defined in sec9 tion 1221(b)), and 

10 ‘‘(2) any investment hedging unit (as defined in 

11 section 492). 

12 ‘‘(e) CROSS REFERENCE.—For provisions requiring 

13 capitalization of certain interest and carrying charges 

14 where there is a straddle, see section 263(g).’’. 

15 (2) CONFORMING AMENDMENTS.—The last sen16 tence of section 246(c)(4) is amended— 

17 (A) by inserting ‘‘(as in effect before its re18 peal)’’ after ‘‘section 1092(c)(4)’’, and 

19 (B) by inserting ‘‘(as so in effect)’’ after 

20 ‘‘section 1092(f)’’. 

21 (c) DEBT INSTRUMENTS HELD BY INSURANCE COM22 PANIES.— 

23 (1) IN GENERAL.—Subsection (a) of section 

24 1221 is amended by striking ‘‘or’’ at the end of 

25 paragraph (7), by striking the period at the end of 


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•S 2621 IS

1 paragraph (8) and inserting ‘‘; or’’, and by adding 

2 at the end the following: 

3 ‘‘(9) any bond, debenture, note, or certificate or 

4 other evidence of indebtedness held by an applicable 

5 insurance company (as defined in subsection 

6 (b)(5)).’’. 

7 (2) APPLICABLE INSURANCE COMPANY.—Sec8 tion 1221(b), as amended by this Act, is amended 

9 by adding at the end the following: 

10 ‘‘(5) APPLICABLE INSURANCE COMPANY.—For 

11 purposes of subsection (a)(9)— 

12 ‘‘(A) IN GENERAL.—The term ‘applicable 

13 insurance company’ means, with respect to any 

14 taxable year, an insurance company (as defined 

15 in the last sentence of section 816(a))— 

16 ‘‘(i) which is subject to tax under sec17 tion 801(a) or section 831(a), 

18 ‘‘(ii) with respect to which sections 

19 831(b), 835, and 842 do not apply, and 

20 ‘‘(iii) which is not treated as a stock 

21 insurance company solely by reason of sec22 tion 833(a)(1). 

23 ‘‘(B) PERMANENT TREATMENT BY COM24 PANY AS ORDINARY ASSET.—If an asset is 

25 treated as an asset described in subsection 


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•S 2621 IS

1 (a)(9) with respect to any applicable insurance 

2 company for any taxable year, such asset shall 

3 be treated as so described during any subse4 quent taxable year such asset is held by such 

5 company.’’. 

6 (3) REGULATIONS.—Paragraph (4) of section 

7 1221(b) is amended— 

8 (A) by striking ‘‘The Secretary’’ and in9 serting: 

10 ‘‘(A) RELATED PARTIES.—The Secretary’’, 

11 and 

12 (B) by adding at the end the following: 

13 ‘‘(B) ASSETS OF INSURANCE COMPA14 NIES.—The Secretary shall prescribe such regu15 lations as may be necessary or appropriate to 

16 carry out the purposes of subsection (a)(9), in17 cluding such regulations as may be necessary to 

18 prevent the avoidance of Federal income tax 

19 through the sale or exchange of assets described 

20 in such subsection.’’. 

21 (4) EFFECTIVE DATE.— 

22 (A) IN GENERAL.—The amendments made 

23 by this subsection shall apply to any bond, de24 benture, note, or certificate or other evidence of 

25 indebtedness held or acquired after the 90-day 


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•S 2621 IS

1 period beginning with the date of the enactment 

2 of this Act. 

3 (B) TRANSITION RULE.—If a taxpayer has 

4 a capital loss carryover to any taxable year of 

5 the taxpayer beginning after the close of the 

6 90-day period described in subparagraph (A), 

7 the taxpayer shall, in addition to other short8 term capital gain of the taxpayer (if any), treat 

9 as short-term capital gain (rather than as ordi10 nary income) an amount equal to the lesser 

11 of— 

12 (i) the net gain (if any) from sales or 

13 exchanges during such taxable year of as14 sets to which section 1221(a)(9) of such 

15 Code (as added by paragraph (1)) applies, 

16 or 

17 (ii) the capital loss carryovers to such 

18 taxable year from taxable years beginning 

19 before the close of such period. 

20 (d) RICS ALLOWED NET OPERATING LOSS DEDUC21 TION.— 

22 (1) IN GENERAL.—Paragraph (2) of section 

23 852(b) is amended by striking subparagraph (B) 

24 and by redesignating subparagraphs (C) through (G) 

25 as subparagraphs (B) through (F), respectively. 


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•S 2621 IS

1 (2) OTHER MODIFICATIONS.—Paragraph (6) of 

2 section 172(d) is amended to read follows: 

3 ‘‘(6) MODIFICATIONS RELATED TO RICS AND

4 REITS.—In the case of any taxable year for which 

5 part I or II of subchapter M applies to the tax6 payer— 

7 ‘‘(A) the net operating loss for such tax8 able year shall be computed by taking into ac9 count— 

10 ‘‘(i) in the case of a regulated invest11 ment company, the adjustments described 

12 in section 852(b)(2) (other than the deduc13 tion for dividends paid described in sub14 paragraph (C) thereof)), and 

15 ‘‘(ii) in the case of a real estate in16 vestment trust, the adjustments described 

17 in section 857(b)(2) (other than the deduc18 tion for dividends paid described in sub19 paragraph (B) thereof), 

20 ‘‘(B) where such taxable year is a ‘prior 

21 taxable year’ referred to in paragraph (2) of 

22 subsection (b), references in such paragraph to 

23 ‘taxable income’ shall be treated as references 

24 to— 


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•S 2621 IS

1 ‘‘(i) in the case of a regulated invest2 ment company, regulated investment com3 pany taxable income (as defined in section 

4 852(b)(2)), and 

5 ‘‘(ii) in the case of a real estate in6 vestment trust, real estate investment tax7 able income (as defined in section 

8 857(b)(2)), and 

9 ‘‘(C) subsection (a)(2) shall be applied by 

10 treating references to taxable income as ref11 erences to— 

12 ‘‘(i) in the case of a regulated invest13 ment company, regulated investment com14 pany taxable income (as defined in section 

15 852(b)(2)) but without regard to the de16 duction for dividends paid (as defined in 

17 section 561), and 

18 ‘‘(ii) in the case of a real estate in19 vestment trust, real estate investment tax20 able income (as defined in section 

21 857(b)(2)) but without regard to the de22 duction for dividends paid (as defined in 

23 section 561).’’. 

24 (3) CONFORMING AMENDMENTS.— 


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•S 2621 IS

1 (A) Section 443(e)(3) is amended by strik2 ing ‘‘section 852(b)(2)(D)’’ and inserting ‘‘sec3 tion 852(b)(2)(C)’’. 

4 (B) Section 852(a)(1)(A) is amended by 

5 striking ‘‘subsection (b)(2)(D)’’ and inserting 

6 ‘‘subsection (b)(2)(C)’’. 

7 (C) Section 4982(e)(1)(A) is amended by 

8 striking ‘‘and (D)’’ and inserting ‘‘and (C)’’. 

9 (4) EFFECTIVE DATE.—The amendments made 

10 by this subsection shall apply to net operating losses 

11 for taxable years ending after the 90th day after the 

12 date of the enactment of this Act. 

13 (e) NONRECOGNITION OF GAIN OR LOSS FROM

14 TRANSACTIONS BY A CORPORATION WITH RESPECT TO

15 ITS STOCK.— 

16 (1) IN GENERAL.—Section 1032 is amended to 

17 read as follows: 

18 ‘‘SEC. 1032. TRANSACTIONS BY A CORPORATION WITH RE19 SPECT TO ITS STOCK. 

20 ‘‘(a) NONRECOGNITION ON EXCHANGE OF STOCK

21 FOR PROPERTY.—No gain or loss shall be recognized to 

22 a corporation on the receipt of money or other property 

23 in exchange for stock of such corporation. 

24 ‘‘(b) DERIVATIVE TRANSACTIONS BY A CORPORATION

25 WITH RESPECT TO ITS STOCK.— 


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1 ‘‘(1) IN GENERAL.—Except as otherwise pro2 vided in this subsection, section 1032 derivative 

3 items of a corporation shall not be taken into ac4 count in determining such corporation’s liability for 

5 tax under this subtitle. 

6 ‘‘(2) INCOME RECOGNITION ON CERTAIN FOR7 WARD CONTRACTS.— 

8 ‘‘(A) IN GENERAL.—If— 

9 ‘‘(i) a corporation acquires its stock, 

10 and 

11 ‘‘(ii) such acquisition is part of a plan 

12 (or series of related transactions) pursuant 

13 to which the corporation enters into a for14 ward contract with respect to its stock, 

15 such corporation shall include amounts in in16 come as if the excess of the amount to be re17 ceived under the forward contract over the fair 

18 market value of the stock as of the date the 

19 corporation entered into the forward contract 

20 were original issue discount on a debt instru21 ment acquired on such date. The preceding sen22 tence shall apply only to the extent that the 

23 amount of stock involved in the forward con24 tract does not exceed the amount acquired as 

25 described in clause (i). 


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1 ‘‘(B) PLAN PRESUMED TO EXIST.—If a 

2 corporation enters into a forward contract with 

3 respect to its stock within the 60-day period be4 ginning on the date which is 30 days before the 

5 date that the corporation acquires its stock, 

6 such acquisition shall be treated as pursuant to 

7 a plan described in subparagraph (A)(ii) unless 

8 it is established that entering into such contract 

9 and such acquisition are not pursuant to a plan 

10 or series of related transactions. 

11 ‘‘(c) SECTION 1032 DERIVATIVE ITEMS.—For pur12 poses of this section, the term ‘section 1032 derivative 

13 item’ means, with respect to any corporation, any item of 

14 income, gain, loss, or deduction if— 

15 ‘‘(1) such item arises out of the rights or obli16 gations under any derivative (as defined in section 

17 493) to the extent such derivative relates to the cor18 poration’s stock (or is attributable to any transfer or 

19 extinguishment of any such right or obligation), or 

20 ‘‘(2) such item arises under any other contract 

21 or position but only to the extent that such item re22 flects (or is determined by reference to) changes in 

23 the value of such stock or distributions thereon. 

24 Such term shall not include any deduction with respect 

25 to which section 83(h) applies and shall not include any 


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•S 2621 IS

1 deduction for any item which is in the nature of compensa2 tion for services rendered. For purposes of this subpara3 graph, de minimis relationships, as determined by the Sec4 retary, shall be disregarded. 

5 ‘‘(d) COORDINATION WITH DERIVATIVE AND STRAD6 DLE RULES.—In the case of a derivative or other contract 

7 or position described in subsection (c) which is held by 

8 a corporation with respect to its stock— 

9 ‘‘(1) this section (rather than part IV of sub10 chapter E or section 1092) shall apply in deter11 mining the treatment of section 1032 derivative 

12 items under this subtitle, and 

13 ‘‘(2) such derivative or other contract or posi14 tion shall not be taken into account in determining 

15 whether the corporation has an investment hedging 

16 unit, applicable property interest, or straddle with 

17 respect to its stock for purposes of such part or sec18 tion. 

19 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

20 such regulations or other guidance as may be appropriate 

21 to carry out the purposes of this section, including regula22 tions or other guidance which treat the portion of an in23 strument which is described in subsection (c)(1) separately 

24 from the portion of such instrument which is not so de25 scribed. 


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•S 2621 IS

1 ‘‘(f) BASIS.—For basis of property acquired by a cor2 poration in certain exchanges for its stock, see section 

3 362.’’. 

4 (2) CLERICAL AMENDMENT.—The item relating 

5 to section 1032 in the table of sections for part III 

6 of subchapter O of chapter 1 is amended to read as 

7 follows: 

‘‘Sec. 1032. Transactions by a corporation with respect to its stock.’’. 

8 (3) EFFECTIVE DATE.—The amendments made 

9 by this subsection shall apply to transactions entered 

10 into after the date of the enactment of this Act. 

11 SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS. 

12 (a) REPEAL OF CERTAIN OTHER SUPERCEDED

13 RULES FOR DETERMINING CAPITAL GAINS AND

14 LOSSES.— 

15 (1) IN GENERAL.—Part IV of subchapter P of 

16 chapter 1 is amended by striking sections 1233, 

17 1234, 1234A, 1234B, 1236, 1256, 1258, 1259, and 

18 1260 (and by striking the items relating to such sec19 tions in the table of sections for such part). 

20 (2) CONFORMING AMENDMENTS RELATED TO

21 REPEAL OF SECTION 1234.—Section 6045(h)(2) is 

22 amended— 

23 (A) by striking ‘‘(as defined in section 

24 1234(b)(2)(A))’’, and 


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•S 2621 IS

1 (B) by adding at the end the following: 

2 ‘‘For purposes of the preceding sentence, the 

3 term ‘closing transaction’ means any termi4 nation of the taxpayer’s obligation under an op5 tion in property other than through the exercise 

6 or lapse of the option.’’. 

7 (3) CONFORMING AMENDMENTS RELATED TO

8 REPEAL OF SECTION 1236.— 

9 (A) Section 475(d)(3)(A) is amended by 

10 striking ‘‘or section 1236(b)’’. 

11 (B) Section 512(b)(5) is amended by strik12 ing ‘‘section 1236(c)’’ and inserting ‘‘section 

13 1058(c)’’. 

14 (C) Section 1058 is amended— 

15 (i) by striking ‘‘(as defined in section 

16 1236(c))’’ in subsection (a), and 

17 (ii) by redesignating subsection (c) as 

18 subsection (d) and by inserting after sub19 section (b) the following new subsection: 

20 ‘‘(c) SECURITIES.—For purposes of this section, the 

21 term ‘security’ means any share of stock in any corpora22 tion, certificate of stock or interest in any corporation, 

23 note, bond, debenture, or evidence of indebtedness, or any 

24 evidence of an interest in or right to subscribe to or pur25 chase any of the foregoing.’’. 


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•S 2621 IS

1 (4) CONFORMING AMENDMENTS RELATED TO

2 REPEAL OF SECTION 1256.— 

3 (A) Section 461(i)(3)(B) is amended to 

4 read as follows: 

5 ‘‘(B) any partnership or other entity (other 

6 than a corporation which is not an S corpora7 tion) if more than 35 percent of the losses of 

8 such entity during the taxable year are allocable 

9 to limited partners or limited entrepreneurs 

10 (within the meaning of subsection (k)(4)), 

11 and’’. 

12 (B) Section 475(d)(1) is amended by strik13 ing ‘‘sections 263(g), 263A, and 1256(a)’’ and 

14 inserting ‘‘sections 263(g) and 263A’’. 

15 (C) Section 988(c)(1) is amended by strik16 ing subparagraphs (D) and (E). 

17 (D) Section 1212 is amended by striking 

18 subsection (c). 

19 (E) Section 1223 is amended by striking 

20 paragraphs (7) and (14). 

21 (F) Section 1281(b)(1)(E) is amended to 

22 read as follows: 

23 ‘‘(E) is part of a hedging transaction (as 

24 defined in section 1221(b)) or an investment 

25 hedging unit (as defined in section 492), or’’. 


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•S 2621 IS

1 (G) Section 1402 is amended by striking 

2 subsection (i). 

3 (H) Section 4982(e)(6)(B) is amended by 

4 striking ‘‘sections 1256 and 1296’’ and insert5 ing ‘‘sections 491 and 1296’’. 

6 (5) CONFORMING AMENDMENTS RELATED TO

7 REPEAL OF SECTION 1259.—Section 475(f)(1) is 

8 amended by striking subparagraph (C) and by redes9 ignating subparagraph (D) as subparagraph (C). 

10 (b) OTHER CONFORMING AMENDMENTS.— 

11 (1) Section 355(g)(2)(B)(i)(V) is amended to 

12 read as follows: 

13 ‘‘(V) any derivative (as defined in 

14 section 493),’’. 

15 (2) Section 856(n)(4) is amended by inserting 

16 ‘‘or derivatives (as defined in section 493)’’ after 

17 ‘‘securities (as defined in section 475(c)(2))’’. 

18 (3) Section 857(e)(2)(C)(i) is amended by strik19 ing ‘‘section 860E or 1272’’ and inserting ‘‘section 

20 491, 860E, or 1272’’. 

21 (4) Section 988(d)(1) is amended— 

22 (A) by striking ‘‘or 1256’’ and inserting 

23 ‘‘or 491’’, and 

24 (B) by striking ‘‘1092, and 1256’’ and in25 serting ‘‘491, and 1092’’. 


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•S 2621 IS

1 (5) Section 1091(e) is amended to read as fol2 lows: 

3 ‘‘(e) COORDINATION WITH MARK TO MARKET OF

4 DERIVATIVES AND UNDERLYING INVESTMENTS.—For 

5 purposes of this section, the term ‘stock or securities’ shall 

6 not include— 

7 ‘‘(1) any derivative (as defined in section 493), 

8 or 

9 ‘‘(2) any underlying investment (as defined in 

10 section 492(e)(1)) which, at the time of the sale or 

11 other disposition, is part of an investment hedging 

12 unit (as defined in section 492).’’. 

13 (6)(A) Section 1221(a)(6) is amended to read 

14 as follows: 

15 ‘‘(6) any— 

16 ‘‘(A) derivative (as defined in section 493), 

17 or 

18 ‘‘(B) any underlying investment (as de19 fined in section 492(e)(1)) which is part of an 

20 investment hedging unit (as defined in section 

21 492),’’. 

22 (B) Section 1221(b) is amended by striking 

23 paragraph (1). 


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•S 2621 IS

1 (7) Section 4975(f)(11)(D) is amended by 

2 striking clauses (i) and (ii) and inserting the fol3 lowing: 

4 ‘‘(i) SECURITY.—The term ‘security’ 

5 means any security described in section 

6 475(c)(2) (without regard to subparagraph 

7 (D)(iii) thereof) and any derivative with re8 spect to such a security (within the mean9 ing of section 493). 

10 ‘‘(ii) COMMODITY.—The term ‘com11 modity’ means any commodity described in 

12 section 475(e)(2) (without regard to sub13 paragraph (B)(iii) thereof) and any deriva14 tive with respect to such a commodity 

15 (within the meaning of section 493).’’. 

16 (8) The table of parts for subchapter E of 

17 chapter 1 is amended by adding at the end the fol18 lowing new item: 

‘‘PART IV. TAX TREATMENT OF DERIVATIVES AND SIMILAR CONTRACTS’’. 

19 SEC. 5. EFFECTIVE DATES. 

20 (a) IN GENERAL.—Except as provided in this Act— 

21 (1) the amendments made by section 2 shall 

22 apply to taxable events occurring after the 90-day 

23 period beginning with the date of the enactment of 

24 this Act, in taxable years ending after the last day 

25 of such period, and 


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1 (2) the amendments made by sections 3 and 4 

2 shall apply to derivatives and underlying investments 

3 held after the last day of such period. 

4 (b) IDENTIFICATION REQUIREMENTS.—If, as of the 

5 close of the 90-day period described in subsection (a)(1), 

6 a taxpayer simultaneously holds 1 or more derivatives with 

7 respect to an underlying investment and the underlying 

8 investment— 

9 (1) the taxpayer shall make the identifications 

10 required under section 492(c)(2) of Internal Rev11 enue Code of 1986 (as added by section 2 of this 

12 Act) before the close of such period, and 

13 (2) if such identifications result in an invest14 ment hedging unit, the first applicable hedging pe15 riod with respect to such unit shall begin on the day 

16 after the close of such period. 

17 (c) DEFINITIONS.—For purposes of this section, any 

18 term used in this section which is also used in part IV 

19 of subchapter E of chapter 1 of such Code (as so added) 

20 shall have the same meaning as when used in such part. 

Æ 


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