To amend the Internal Revenue Code of 1986 to prevent the conversion of ordinary income or short-term capital gain into income eligible for the long-term capital gain rates, and for other purposes.

SECTION 1. CAPITAL GAIN TREATMENT OF GAIN FROM CONSTRUCTIVE OWNERSHIP 
              TRANSACTIONS.

    (a) In General.--Part IV of subchapter P of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special rules for 
determining capital gains and losses) is amended by inserting after 
section 1259 the following new section:

``SEC. 1260. GAINS FROM CONSTRUCTIVE OWNERSHIP TRANSACTIONS.

    ``(a) In General.--If the taxpayer has gain from a constructive 
ownership transaction with respect to any financial position and such 
gain would (without regard to this section) be treated as a long-term 
capital gain--
            ``(1) such gain shall be treated as short-term capital gain 
        to the extent that such gain exceeds the net underlying long-
        term capital gain, and
            ``(2) to the extent such gain is treated as a long-term 
        capital gain after the application of paragraph (1), the 
        determination of the capital gain rate (or rates) applicable to 
        such gain under section 1(h) shall be determined on the basis 
        of the respective rate (or rates) that would have been 
        applicable to the net underlying long-term capital gain.
    ``(b) Interest Charge on Deferral of Gain Recognition.--
            ``(1) In general.--If any gain is treated as short-term 
        capital gain for any taxable year by reason of subsection 
        (a)(1), the taxpayer's tax imposed by this chapter for such 
        taxable year shall be increased by the amount of interest which 
        would have been imposed under section 6601--
                    ``(A) for periods ending on the due date (without 
                extensions) for the return of tax imposed by this 
                chapter for such taxable year, and
                    ``(B) on underpayments of tax for prior taxable 
                years which would have resulted had such gain been 
                included in gross income ratably during the period the 
                constructive ownership transaction was open.
        Any amount payable under this paragraph shall be taken into 
        account in computing the amount of any deduction allowable to 
        the taxpayer for interest paid or accrued during such taxable 
        year.
            ``(2) No credits against increase in tax.--Any increase in 
        tax under paragraph (1) shall not be treated as tax imposed by 
        this chapter for purposes of determining--
                    ``(A) the amount of any credit allowable under 
                subpart A, B, D, or G of part IV of subchapter A of 
                chapter 1, or
                    ``(B) the amount of the tax imposed by section 55.
    ``(c) Financial Position.--For purposes of this section--
            ``(1) In general.--The term `financial position' means any 
        position with respect to any stock, debt instrument, 
        partnership interest, or investment trust interest.
            ``(2) Position.--The term `position' means an interest, 
        including a futures or forward contract, short sale, or option.
    ``(d) Constructive Ownership Transaction.--
            ``(1) In general.--The taxpayer shall be treated as having 
        entered into a constructive ownership transaction with respect 
        to any financial position if the taxpayer (or a related 
        person)--
                    ``(A) holds a long position under a notional 
                principal contract with respect to the same or 
                substantially identical property,
                    ``(B) enters into a forward or futures contract to 
                acquire the same or substantially identical property,
                    ``(C) is the grantor of a put, and is the holder of 
                a call, with respect to the same or substantially 
                identical property and such options have substantially 
                equal strike prices, or
                    ``(D) 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 positions which are marked to market.--
        This section shall not apply to any constructive ownership 
        transaction if all of the positions which are part of such 
        transaction are marked to market under any provision of this 
        title or the regulations thereunder.
            ``(3) Long position.--A person shall be treated as holding 
        a long position under a notional principal contract with 
        respect to any property if such person--
                    ``(A) has the right to be paid (or receive credit 
                for) all or substantially all of the investment yield 
                (including appreciation) on such property for a 
                specified period, and
                    ``(B) is obligated to reimburse (or provide credit) 
                for all or substantially all of any decline in the 
                value of such property.
            ``(4) Forward contract.--The term `forward contract' has 
        the meaning given to such term by section 1259(d)(1).
            ``(5) Related person.--The term `related person' has the 
        meaning given to such term by section 1259(c)(4).
    ``(e) Net Underlying Long-Term Capital Gain.--For purposes of this 
section, in the case of any constructive ownership transaction with 
respect to any financial position, the term `net underlying long-term 
capital gain' means the aggregate net capital gain that the taxpayer 
would have had if--
            ``(1) such position had been acquired on the date such 
        transaction was opened and sold on the date such transaction 
        was closed, and
            ``(2) only gains and losses that would have resulted from 
        the deemed ownership under paragraph (1) were taken into 
        account.
The amount of the net underlying long-term capital gain with respect to 
any financial position shall be treated as zero unless the amount 
thereof is established by clear and convincing evidence.
    ``(f) Exception If Mark to Market Elected.--
            ``(1) In general.--In the case of a taxpayer who elects to 
        have this subsection apply--
                    ``(A) subsections (a) and (b) shall not apply,
                    ``(B) such taxpayer shall recognize gain or loss on 
                any constructive ownership transaction which is open as 
                of the close of any taxable year as if the financial 
                position to which such transaction relates were sold 
                for its fair market value on the last business day of 
                such taxable year, and
                    ``(C) any gain or loss shall be taken into account 
                for such taxable year.
        Proper adjustment shall be made in the amount of any gain or 
        loss subsequently realized for gain or loss taken into account 
        under the preceding sentence.
            ``(2) Character of gain or loss.--
                    ``(A) In general.--Any gain or loss with respect to 
                a constructive ownership transaction under paragraph 
                (1) shall be treated as ordinary income or loss.
                    ``(B) Special rule for dispositions.--If--
                            ``(i) gain or loss is recognized with 
                        respect to a constructive ownership transaction 
                        before the close of the taxable year, and
                            ``(ii) paragraph (1) would have applied if 
                        the transaction were open as of the close of 
                        the taxable year,
                such gain or loss shall be treated as ordinary income 
                or loss.
            ``(3) Election.--An election under paragraph (1) may be 
        made without the consent of the Secretary. Such an election, 
        once made, shall apply to the taxable year for which made and 
        all subsequent taxable years unless revoked with the consent of 
        the Secretary.
    ``(g) 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. 1260. Gains from constructive 
                                        ownership transactions.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to gain recognized after the date of the enactment of this Act.

Summary: Amends the Internal Revenue Code to treat a gain as a short-term capital gain to the extent such gain exceeds the net underlying long-term capital gain where the taxpayer has gain from a constructive ownership transaction with respect to any financial position and such gain otherwise would be treated as a long-term capital gain.  Provides that, to the extent such gain is treated as a long-term capital gain after the application of the previous sentence, the determination of the applicable capital gain rate (or rates) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.  Sets forth definitions and exceptions.