[Congressional Bills 117th Congress]
[From the U.S. Government Publishing Office]
[S. 2621 Introduced in Senate (IS)]
<DOC>
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.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) Short Title.--This Act may be cited as the ``Modernization of
Derivatives Tax Act of 2021''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is expressed in
terms of an amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section or other
provision of the Internal Revenue Code of 1986.
SEC. 2. MODERNIZATION OF TAX TREATMENT OF CERTAIN DERIVATIVES.
(a) In General.--Subchapter E of chapter 1 is amended by adding at
the end the following new part:
``PART IV--TAX TREATMENT OF DERIVATIVES AND SIMILAR CONTRACTS
``subpart a. derivatives
``subpart b. similar contracts
``Subpart A--Derivatives
``Sec. 491. Rules for treatment of derivatives.
``Sec. 492. Investment hedging units.
``Sec. 493. Derivative defined.
``SEC. 491. RULES FOR TREATMENT OF DERIVATIVES.
``(a) In General.--For purposes of this title, if there is a
taxable event with respect to a derivative or an underlying
investment--
``(1) notwithstanding any other provision of this title,
except as provided in subsection (b)(3)(A) or section 1032,
gain or loss shall be recognized and taken into account in the
taxable year in which the taxable event occurs, and
``(2) proper adjustment shall be made in the amount of any
subsequent gain or loss for gain or loss taken into account by
reason of paragraph (1).
``(b) Rules Relating to Gain or Loss.--Notwithstanding any other
provision of this title--
``(1) Character and source of gain or loss.--
``(A) Character.--Except as provided in paragraph
(3)(A), any item of income, deduction, gain, or loss
taken into account under subsection (a) with respect to
a taxable event shall be treated as--
``(i) ordinary income or loss, and
``(ii) attributable to a trade or business
of the taxpayer for purposes of sections 62(a)
and 172(d)(4).
``(B) Source of gain or loss from derivatives.--In
the case of a taxable event with respect to a
derivative, any item of income, deduction, gain, or
loss taken into account under subsection (a) shall be
treated as derived from sources within the country of
residence, incorporation, or organization of the
taxpayer.
``(2) Determination of amount.--
``(A) In general.--The amount of gain or loss taken
into account under subsection (a) with respect to a
taxable event shall be--
``(i) in the case of a taxable event
involving the termination or transfer of a
derivative or the sale or exchange of an
underlying investment, the amount of gain or
loss determined under this title with respect
to the taxable event, or
``(ii) in the case of any other taxable
event, the amount of gain or loss which would
be determined under this title if, immediately
before the taxable event--
``(I) in the case of a derivative,
the derivative were terminated or
transferred at its fair market value,
or
``(II) in the case of an underlying
investment, the investment were sold or
exchanged at its fair market value.
``(B) Reliance on valuation.--For purposes of
subparagraph (A), the taxpayer may rely on a valuation
which is--
``(i) provided to the taxpayer by a broker
under section 6045(b), or
``(ii) determined under an applicable
financial statement.
``(3) Special rules for taxable events with respect to
investment hedging units.--
``(A) In general.--In the case of a taxable event
described in subsection (c)(2) with respect to a
derivative or underlying investment (other than a
termination or transfer of the derivative or the sale
or exchange of the underlying investment)--
``(i) notwithstanding subsection (a),
built-in loss (if any) with respect to the
derivative or underlying investment shall not
be recognized and shall not be taken into
account by reason of such taxable event, and
``(ii) notwithstanding paragraph (1),
built-in gain (if any) with respect to the
underlying investment shall be treated as long-
term or short-term capital gain if the built-in
gain would have been so treated if the
investment were sold or exchanged at its fair
market value immediately before the time that
the built-in gain is determined under
subparagraph (D).
``(B) Identification.--For purposes of this
paragraph, the determination of which portions of an
underlying investment have been deemed sold or
exchanged in a taxable event shall be made in the same
manner as if there had been an actual sale or exchange.
``(C) Built-in loss.--For purposes of this section,
the term `built-in loss' means, with respect to any
derivative or underlying investment in an investment
hedging unit, any loss which would have been recognized
and taken into account under subsection (a) if the
derivative were terminated or transferred, or the
underlying investment were sold or exchanged, at its
fair market value as of the later of the time that the
investment hedging unit was established or the time
that the derivative or the underlying investment became
part of the investment hedging unit.
``(D) Built-in gain.--For purposes of this section,
the term `built-in gain' means, with respect to any
underlying investment in an investment hedging unit,
any gain which would have been recognized and taken
into account under subsection (a) if the underlying
investment were sold or exchanged at its fair market
value as of the later of the time that the investment
hedging unit was established or the time that the
underlying investment became part of the investment
hedging unit.
``(c) Taxable Event.--For purposes of this part, the term `taxable
event' means--
``(1) with respect to any derivative which is not part of
an investment hedging unit--
``(A) the termination or transfer of such
derivative, and
``(B) the close of any taxable year if the taxpayer
has rights or obligations with respect to such
derivative at such time, and
``(2) with respect to all derivatives and underlying
investments which are part of the same investment hedging
unit--
``(A) the establishment of the investment hedging
unit,
``(B) the termination or transfer of any such
derivative,
``(C) the sale or exchange of all or any portion of
any such underlying investment,
``(D) the entering into of another derivative, or
the acquisition of an additional amount of such
underlying investment, after the establishment of the
investment hedging unit if such derivative or
additional amount is treated as part of the investment
hedging unit under section 492, and
``(E) in the case of--
``(i) an investment hedging unit with
respect to which an election is in effect under
section 492(b), the close of each business day,
and
``(ii) any other investment hedging unit,
the close of any taxable year if the applicable
hedging period with respect to such unit
includes such close.
``(3) Termination or transfer.--For purposes of this part,
the term `termination or transfer' includes, with respect to
any derivative, any termination or transfer by offsetting, by
taking or making delivery, by exercise or being exercised, by
assignment or being assigned, by lapse, by sale or other
disposition, by assumption, or otherwise.
``(d) Treatment of Payments With Respect to Certain Derivatives.--
Notwithstanding any other provision of this title--
``(1) In general.--Except as provided by the Secretary, in
the case of a payment pursuant to a derivative (other than an
option)--
``(A) any item of income, deduction, gain, or loss
with respect to the payment shall be taken into account
for purposes of this title at the time of the payment,
and
``(B) proper adjustment shall be made in the amount
of any subsequent gain or loss for items taken into
account by reason of subparagraph (A).
This paragraph shall not apply to a payment in connection with
a taxable event.
``(2) Rules relating to character and source of gain or
loss.--In the case of any item of income, deduction, gain, or
loss with respect to payments described in paragraph (1)--
``(A) the rules of subsection (b)(1)(A) shall apply
in determining the character of such item, and
``(B) except as provided in section 871(m), the
rule of subsection (b)(1)(B) shall apply in determining
the source of such item.
``(e) Suspension of Holding Period While Underlying Investment Part
of Investment Hedging Unit.--For purposes of section 1222, in the case
of any underlying investment which is part of an investment hedging
unit, the holding period for such investment shall not include any
period during which the underlying investment is part of such unit.
``(f) Applicable Financial Statement.--For purposes of this part,
the term `applicable financial statement' means--
``(1) a financial statement which is certified as being
prepared in accordance with generally accepted accounting
principles and which is--
``(A) a 10-K (or successor form), or annual
statement to shareholders, required to be filed by the
taxpayer with the United States Securities and Exchange
Commission,
``(B) an audited financial statement of the
taxpayer which is used for--
``(i) credit purposes,
``(ii) reporting to shareholders, partners,
or other proprietors, or to beneficiaries, or
``(iii) any other substantial nontax
purpose,
but only if there is no statement of the taxpayer
described in subparagraph (A), or
``(C) filed by the taxpayer with any other Federal
agency for purposes other than Federal tax purposes,
but only if there is no statement of the taxpayer
described in subparagraph (A) or (B),
``(2) a financial statement which is made on the basis of
international financial reporting standards and is filed by the
taxpayer with an agency of a foreign government which is
equivalent to the United States Securities and Exchange
Commission and which has reporting standards not less stringent
than the standards required by such Commission, but only if
there is no statement of the taxpayer described in paragraph
(1), or
``(3) a financial statement filed by the taxpayer with any
other regulatory or governmental body specified by the
Secretary, but only if there is no statement of the taxpayer
described in paragraph (1) or (2).
``SEC. 492. INVESTMENT HEDGING UNITS.
``(a) Investment Hedging Unit.--For purposes of this part--
``(1) In general.--Except as provided in subsection (b)--
``(A) a taxpayer shall be treated as having an
investment hedging unit with respect to an underlying
investment during any applicable hedging period with
respect to the underlying investment, and
``(B) subject to paragraph (3), such investment
hedging unit shall at any time during the applicable
hedging period consist of the following held by the
taxpayer at such time:
``(i) Each derivative with respect to the
underlying investment which has a delta with
respect to any portion of the underlying
investment which is within the range beginning
with minus 0.7 and ending with minus 1.0.
``(ii) Each portion of the underlying
investment described in clause (i) with respect
to which any derivative has a delta within the
range described in clause (i).
``(2) Applicable hedging period.--The term `applicable
hedging period' means, with respect to any underlying
investment of a taxpayer, a continuous period--
``(A) beginning with the first time (after a period
which is not an applicable hedging period) the taxpayer
holds 1 or more of the derivatives with respect to the
underlying investment, and 1 or more portions of the
underlying investment, which are described in paragraph
(1)(B), and
``(B) ending with the time none of such derivatives
and portions are so described.
``(3) Special rules relating to delta and combining
derivatives.--
``(A) In general.--For purposes of this
subsection--
``(i) a derivative with respect to an
underlying investment shall be treated as
having a delta within the range described in
paragraph (1)(B)(i) if the derivative by
itself, or in combination with 1 or more other
derivatives, has such delta with respect to any
portion of such underlying investment, and
``(ii) the determination under paragraph
(1)(B) of which derivatives have such delta,
and each portion of the underlying investment
with respect to which such derivatives have
such delta, shall be made in the manner which
results in the largest portion of such
underlying investment being so described.
``(B) Secretarial authority for applicable traded
derivatives.--The Secretary may prescribe regulations
or other guidance to modify the rules under
subparagraph (A) to simplify the application of such
rules to applicable traded derivatives.
``(4) Applicable traded derivatives.--For purposes of
paragraph (3)--
``(A) In general.--The term `applicable traded
derivative' means any listed option or regulated
futures contract.
``(B) Regulated futures contract.--The term
`regulated futures contract' means a contract--
``(i) with respect to which the amount
required to be deposited and the amount which
may be withdrawn depends on a system of marking
to market, and
``(ii) which is traded on (or subject to
the rules of) a qualified board or exchange.
``(C) Listed option.--The term `listed option'
means any option (other than a right to acquire stock
from the issuer) which is traded on (or subject to the
rules of) a qualified board or exchange.
``(D) Qualified board or exchange.--The term
`qualified board or exchange' means--
``(i) a national securities exchange which
is registered with the Securities and Exchange
Commission,
``(ii) a domestic board of trade designated
as a contract market by the Commodity Futures
Trading Commission, or
``(iii) any other exchange, board of trade,
or other market which the Secretary determines
has rules adequate to carry out the purposes of
this part.
``(b) Election With Respect to Items Included in Investment Hedging
Unit.--
``(1) In general.--For purposes of this part, a taxpayer
may elect to treat all derivatives with respect to an
underlying investment, and all of such underlying investment,
as part of an investment hedging unit.
``(2) Election.--Any election under this subsection with
respect to an underlying investment--
``(A) shall apply to all derivatives with respect
to such underlying investment, and all of such
underlying investment, held at any time after the
election is made (including during any period such
derivatives or underlying investment are not held
simultaneously), and
``(B) shall be irrevocable.
``(3) Deemed election for taxpayers failing to identify.--
``(A) In general.--If a taxpayer--
``(i) does not have an election in effect
under paragraph (1) with respect to an
underlying investment, and
``(ii) fails to meet the requirements of
subsection (c) for testing and identifying
derivatives with respect to the underlying
investment,
the taxpayer shall be treated as having made the
election under paragraph (1).
``(B) Treatment of election.--For purposes of
paragraph (2), a deemed election under this paragraph--
``(i) shall be treated as made as of the
first time the taxpayer fails to meet the
requirements of subsection (c) with respect to
the underlying investment, and
``(ii) notwithstanding paragraph (2)(B),
may be revoked with the consent of the
Secretary.
``(c) Definitions and Rules Relating to Taxpayers Identifying
Investment Hedging Units.--In the case of a taxpayer with respect to
which an election is not in effect under subsection (b) with respect to
an underlying investment--
``(1) In general.--The taxpayer shall, at the times
described in paragraph (3), test the derivatives with respect
to the underlying investment and make the identifications
described in paragraph (2).
``(2) Identification.--
``(A) In general.--The taxpayer shall identify the
following with respect to an underlying investment:
``(i) Each derivative described in
subsection (a)(1)(B)(i).
``(ii) Each portion of the underlying
investment described in subsection
(a)(1)(B)(ii).
``(B) Derivatives and underlying investment not
part of investment hedging unit.--A taxpayer shall
identify the derivatives with respect to an underlying
investment, and the portions of the underlying
investment, which are not required to be identified
under subparagraph (A).
``(C) Portion may include all of underlying
investment.--For purposes of this part, the term
`portion' with respect to any underlying investment
identified may include all of the underlying
investment.
``(3) Times identifications required to be made.--
``(A) In general.--The taxpayer shall test and make
the identifications required under this subsection at
the following times during any continuous period the
taxpayer simultaneously holds 1 or more derivatives
with respect to an underlying investment and 1 or more
portions of the underlying investment:
``(i) The beginning of the period.
``(ii) Immediately after the taxpayer
(during such period)--
``(I) enters into another
derivative with respect to the
underlying investment or acquires an
additional amount of such underlying
investment, or
``(II) terminates or transfers 1 or
more derivatives with respect to the
underlying investment or sells or
exchanges any portion of the underlying
investment, except that no testing and
identification shall be required under
this subclause with respect to any such
transaction if the taxpayer does not
have an investment hedging unit with
respect to the underlying investment
immediately before such transaction.
``(iii) Such other times during such period
as the Secretary may prescribe by regulations
or other guidance.
``(B) No other times for testing.--Except as
provided by the Secretary, there shall not be taken
into account for purposes of this part any testing and
identification done by the taxpayer with respect to an
underlying investment at a time other than the times
required under subparagraph (A).
``(4) Manner.--A taxpayer shall be treated as timely making
the identifications required under this subsection if the
derivatives with respect to, and each portion of, an underlying
investment are clearly identified as part of (or as not part
of) the investment hedging unit for purposes of this paragraph
before the close of the day on which the identification is
required (or such other time as the Secretary may prescribe).
``(5) Treatment of incorrect identification.--The Secretary
shall prescribe regulations or other guidance to properly
characterize any income, gain, expense, or loss arising from
any derivative or underlying investment which is incorrectly
identified under paragraph (2) as being part of, or not being
part of, an investment hedging unit.
``(d) Delta.--For purposes of this section--
``(1) In general.--The term `delta' means, with respect to
any derivative and underlying investment, the ratio of the
expected change in the fair market value of the derivative to a
very small change in the fair market value of the underlying
investment.
``(2) Method of determination.--The delta with respect to
any derivative with respect to an underlying investment (or any
combination of such derivatives) shall be determined--
``(A) in a commercially reasonable manner, and
``(B) except as provided by the Secretary, in a
manner which is consistent with the manner used by the
taxpayer or the taxpayer's broker for purposes of an
applicable financial statement.
``(3) Time for making determination.--The delta with
respect to any derivative and underlying investment shall be
determined as of any date the taxpayer is required to make the
identifications described in subsection (c).
``(4) Multiple underlying investments.--
``(A) In general.--Except as provided in
subparagraph (B), if the value of a derivative is
determined by reference to more than 1 underlying
investment, the delta shall be determined separately
with respect to each underlying investment.
``(B) Methods for combinations of underlying
investments.--The Secretary may provide methods for
determining the delta of any derivative with respect to
combinations of 2 or more underlying investments.
``(e) Other Definitions and Rules.--For purposes of this part--
``(1) Underlying investment.--
``(A) In general.--The term `underlying investment'
means, with respect to any derivative, any item--
``(i) which is described in any of the
paragraphs (1) through (8) of section 493(a)
(or any item substantially the same as any such
item), and
``(ii) by reference to which the value of
the derivative, or any payment or other
transfer with respect to the derivative, is
determined either directly or indirectly.
``(B) Coordination with section 475.--In the case
of a dealer in securities to which section 475 applies
(and a dealer in commodities with respect to which an
election is in effect under section 475(e)), such term
shall not include any item which, but for this
subparagraph, would be treated as an underlying
investment if such item is treated as a security under
section 475 (including a commodity treated as a
security under section 475(e)).
``(C) Indirect determinations.--For purposes of
subparagraph (A)(ii), the value of, or any payment or
other transfer with respect to, a derivative shall not
be treated as indirectly determined by reference to one
or more of the items described in paragraphs (1)
through (8) of section 493(a) solely because the change
in a variable affecting such value, payment, or other
transfer also affects the value, level, amount, or
calculation of such item or items.
``(2) Establishment of investment hedging unit.--A taxpayer
shall be treated as having established an investment hedging
unit with respect to an underlying investment--
``(A) in the case of a taxpayer with an election in
effect under subsection (b) with respect to the
underlying investment, as of the date the election
takes effect, and
``(B) in the case of any other taxpayer, as of the
beginning of each applicable hedging period with
respect to the underlying investment.
``(3) Related parties, etc.--For purposes of this section--
``(A) Attribution between related persons.--Any
derivative or underlying investment held by a related
party (within the meaning of subsection (f)) with
respect to the taxpayer shall be treated as held by the
taxpayer.
``(B) Certain pass-through entities.--If part or
all of the income, gain, loss, or expense with respect
to a derivative or underlying investment held by a
partnership, trust, or other entity would properly be
taken into account for purposes of this chapter by the
taxpayer, then, except to the extent otherwise provided
by the Secretary, such derivative or investment shall
be treated as held by the taxpayer.
``(C) Stock and debt whose value primarily
determined by reference to other items.--Except as
provided by the Secretary, if the taxpayer holds an
item described in paragraph (1) or (3) of section
493(a) the value of which, or with respect to which any
payment or other transfer, is primarily determined by
reference to one or more other items described in
paragraphs (1) through (8) of section 493(a), then,
solely for purposes of this subpart, such item
described in paragraph (1) or (3) of section 493(a)
shall also be treated as if it were such other item.
``(f) Related Party.--For purposes of this section--
``(1) In general.--A person is a related party to the
taxpayer if, with respect to any period during which a
derivative or underlying investment is held by such person,
such person--
``(A) is the taxpayer's spouse,
``(B) is a dependent of the taxpayer or any other
taxpayer with respect to whom the taxpayer is a
dependent,
``(C) is an individual, corporation, partnership,
trust, or estate which controls, or is controlled by
(within the meaning of section 954(d)(3)), the taxpayer
or any individual described in subparagraph (A) or (B)
with respect to the taxpayer (or any combination
thereof),
``(D) is an individual retirement plan, Archer MSA
(as defined in section 220(d)), or health savings
account (as defined in section 223(d)), of the taxpayer
or of any individual described in subparagraph (A) or
(B) with respect to the taxpayer,
``(E) is an account under a qualified tuition
program described in section 529, an ABLE account (as
defined in section 529A(e)(6)), or a Coverdell
education savings account (as defined in section
530(b)) if the taxpayer, or any individual described in
subparagraph (A) or (B) with respect to the taxpayer,
is the designated beneficiary of such account or has
the right to make any decision with respect to the
investment of any amount in such account,
``(F) is an account under--
``(i) a plan described in section 401(a),
``(ii) an annuity plan described in section
403(a),
``(iii) an annuity contract described in
section 403(b), or
``(iv) an eligible deferred compensation
plan described in section 457(b) and maintained
by an employer described in section
457(e)(1)(A),
if the taxpayer or any individual described in
subparagraph (A) or (B) with respect to the taxpayer
has the right to make any decision with respect to the
investment of any amount in such account, or
``(G) files a consolidated return (within the
meaning of section 1501) with the taxpayer for any
taxable year which includes a portion of such period.
``(2) Determination of marital status.--
``(A) In general.--Except as provided in
subparagraph (B), marital status shall be determined
under section 7703.
``(B) Special rule for married individuals filing
separately and living apart.--A husband and wife who--
``(i) file separate returns for any taxable
year, and
``(ii) live apart at all times during such
taxable year,
shall not be treated as married individuals.
``(g) Regulations.--The Secretary shall prescribe such regulations
or other guidance as may be appropriate to carry out this section,
including regulations or guidance which require in appropriate cases a
taxpayer to bifurcate derivatives described in subsection (d)(4) for
purposes of applying this part or which may be necessary to prevent the
avoidance of the purposes of subsection (f) (including treating persons
as related parties if such persons are formed or availed of to avoid
the purposes of such subsection).
``SEC. 493. DERIVATIVE DEFINED.
``(a) In General.--For purposes of this part, except as otherwise
provided in this section, the term `derivative' means any contract
(including any option, forward contract, futures contract, short
position, swap, or similar contract) the value of which, or any payment
or other transfer with respect to which, is (directly or indirectly)
determined by reference to one or more of the following:
``(1) Any share of stock in a corporation.
``(2) Any partnership or beneficial ownership interest in a
partnership or trust.
``(3) Any evidence of indebtedness.
``(4) Except as provided in subsection (b)(1), any real
property.
``(5) Any commodity which is actively traded (within the
meaning of section 1092(c)(4)).
``(6) Any currency.
``(7) Any rate, price, amount, index, formula, or
algorithm.
``(8) Any other item which the Secretary may prescribe.
Except as provided by the Secretary to prevent the avoidance of the
purposes of this part, such term shall not include any item described
in paragraphs (1) through (8). For purposes of this subsection, the
value of, or any payment or other transfer with respect to, a contract
shall not be treated as indirectly determined by reference to one or
more of the items described in paragraphs (1) through (8) solely
because the change in a variable affecting such value, payment, or
other transfer also affects the value, level, amount, or calculation of
such item or items.
``(b) Exceptions.--
``(1) Certain real property.--
``(A) In general.--For purposes of this part, the
term `derivative' shall not include any contract with
respect to interests in real property (as defined in
section 856(c)(5)(C)) if such contract requires
physical delivery of such real property.
``(B) Options to settle in cash.--
``(i) In general.--For purposes of
subparagraph (A), a contract which provides for
an option of cash settlement shall not be
treated as requiring physical delivery of real
property unless the option is exercisable only
in unusual and exceptional circumstances.
``(ii) Option of cash settlement.--For
purposes of clause (i), a contract provides an
option of cash settlement if the contract
settles in (or could be settled in) cash or
property other than the underlying real
property.
``(2) Hedging transactions.--
``(A) In general.--For purposes of this part, the
term `derivative' shall not include any contract which
is part of a hedging transaction (as defined in section
1221(b)).
``(B) Section 988 hedging transactions.--For
exception for section 988 hedging transactions, see
section 988(d)(1).
``(3) Securities lending, sale-repurchase, and similar
financing transactions.--To the extent provided by the
Secretary, for purposes of this part, the term `derivative'
shall not include the right to the return of the same or
substantially identical securities transferred in a securities
lending transaction, sale-repurchase transaction, or similar
financing transaction.
``(4) Options received in connection with the performance
of services.--For purposes of this part, the term `derivative'
shall not include any option described in section 83(e)(3)
received in connection with the performance of services.
``(5) Insurance, annuity, and endowment contracts.--For
purposes of this part, the term `derivative' shall not include
any insurance, annuity, or endowment contract issued by an
insurance company to which subchapter L applies (or issued by
any foreign corporation to which such subchapter would apply if
such foreign corporation were a domestic corporation).
``(6) Derivatives with respect to stock of members of same
worldwide affiliated group.--
``(A) In general.--For purposes of this part, the
term `derivative' shall not include any derivative
(determined without regard to this paragraph) with
respect to stock issued by any member of the same
worldwide affiliated group in which the taxpayer is a
member.
``(B) Worldwide affiliated group.-- For purposes of
this paragraph, the term `worldwide affiliated group'
means a group consisting of--
``(i) the includible members of an
affiliated group (as defined in section
1504(a), determined without regard to paragraph
(2) of section 1504(b)), and
``(ii) all controlled foreign corporations
in which such members in the aggregate meet the
ownership requirements of section 1504(a)(2)
either directly or indirectly through applying
paragraph (2) of section 958(a) or through
applying rules similar to the rules of such
paragraph to stock owned directly or indirectly
by domestic partnerships, trusts, or estates.
``(7) Commodities used in normal course of trade or
business.--For purposes of this part, the term `derivative'
shall not include any contract with respect to any commodity
if--
``(A) such contract requires physical delivery with
the option of cash settlement only in unusual and
exceptional circumstances, and
``(B) such commodity is used (and is used in
quantities with respect to which such derivative
relates) in the normal course of the taxpayer's trade
or business (or, in the case of an individual, for
personal consumption).
``(c) Contracts With Embedded Derivative Components.--
``(1) In general.--If a contract has derivative and
nonderivative components, then each derivative component shall
be treated as a derivative for purposes of this part. If the
derivative component cannot be separately valued, then the
entire contract shall be treated as a derivative for purposes
of this part.
``(2) Exception for certain embedded derivative components
of debt instruments.--A debt instrument shall not be treated as
having a derivative component merely because--
``(A) such debt instrument is denominated in a
nonfunctional currency (as defined in section
988(c)(1)(C)(ii)), or
``(B) payments with respect to such debt instrument
are determined by reference to the value of a
nonfunctional currency (as so defined).
``(d) Treatment of American Depository Receipts and Similar
Instruments.--Except as otherwise provided by the Secretary, for
purposes of this part, American depository receipts (and similar
instruments) with respect to shares of stock in foreign corporations
shall be treated as shares of stock in such foreign corporations.
``Subpart B--Similar Contracts
``Sec. 494. Tax treatment of contracts similar to derivatives.
``SEC. 494. TAX TREATMENT OF CONTRACTS SIMILAR TO DERIVATIVES.
``(a) In General.--For purposes of this title, if there is a
taxable transaction with respect to any applicable property interest,
then, notwithstanding any other provision of this title other than
section 1032, gain or loss attributable to the taxable transaction
shall be considered gain or loss from the sale or exchange of property
which has the same character as the property to which the applicable
property interest relates has (or would have) in the hands of the
taxpayer.
``(b) Definitions.--For purposes of this section--
``(1) Applicable property interest.--The term `applicable
property interest' means any right or obligation with respect
to property other than--
``(A) a derivative (as defined in section 493), or
``(B) any position in applicable property to which
section 1092 applies.
``(2) Taxable transaction.--The term `taxable transaction'
means, with respect to any applicable property interest--
``(A) any termination or transfer (as defined in
section 491(c)(3)) of such interest, or
``(B) any payment in fulfillment or partial
fulfillment of such interest.''.
SEC. 3. COORDINATION OF NEW RULES WITH EXISTING RULES.
(a) Coordination With Rules for Dealers and Traders.--
(1) Derivatives not treated as securities.--Section
475(c)(2) is amended--
(A) by adding ``and'' at the end of subparagraph
(C),
(B) by striking subparagraphs (D) and (E) and by
redesignating subparagraph (F) as subparagraph (D),
(C) by striking ``subparagraph (A), (B), (C), (D),
or (E)'' in subparagraph (D)(i), as so redesignated,
and inserting ``subparagraph (A), (B), or (C)'', and
(D) by amending the last sentence to read as
follows: ``Such term shall not include any derivative
to which section 491(a) applies.''.
(2) Derivatives not treated as commodities.--Section
475(e)(2) is amended--
(A) by adding ``and'' at the end of subparagraph
(A),
(B) by striking subparagraphs (B) and (C) and by
redesignating subparagraph (D) as subparagraph (B), and
(C) by striking ``subparagraph (A), (B) or (C)'' in
subparagraph (B)(i), as so redesignated, and inserting
``subparagraph (A)''.
(3) Conforming amendments.--
(A) Section 475(b) is amended by striking paragraph
(4).
(B) Section 475(d)(2)(B) is amended--
(i) by striking ``subsection
(c)(2)(F)(iii)'' and inserting ``subsection
(c)(2)(D)(iii)'', and
(ii) by striking ``subsection (c)(2)(F)''
and inserting ``subsection (c)(2)(D)''.
(C) Section 475(f)(1)(D) is amended by striking
``subsections (b)(4) and (d)'' and inserting
``subsection (d)''.
(b) Coordination With Straddle Rules.--
(1) In general.--Section 1092 is amended to read as
follows:
``SEC. 1092. STRADDLES.
``(a) Recognition of Loss in Case of Straddles, etc.--
``(1) Limitation on recognition of loss.--
``(A) In general.--Any loss with respect to 1 or
more positions shall be taken into account for any
taxable year only to the extent that the amount of such
loss exceeds the unrecognized gain (if any) with
respect to 1 or more positions which were offsetting
positions with respect to 1 or more positions from
which the loss arose.
``(B) Carryover of loss.--Any loss which may not be
taken into account under subparagraph (A) for any
taxable year shall, subject to the limitations under
subparagraph (A), be treated as sustained in the
succeeding taxable year.
``(2) Unrecognized gain.--For purposes of this subsection--
``(A) In general.--The term `unrecognized gain'
means--
``(i) in the case of any position held by
the taxpayer as of the close of the taxable
year, the amount of gain which would be taken
into account with respect to such position if
such position were sold on the last business
day of such taxable year at its fair market
value, and
``(ii) in the case of any position with
respect to which, as of the close of the
taxable year, gain has been realized but not
recognized, the amount of gain so realized.
``(B) Reporting of gain.--Each taxpayer shall
disclose to the Secretary, at such time and in such
manner and form as the Secretary may prescribe--
``(i) each position (whether or not part of
a straddle) with respect to which, as of the
close of the taxable year, there is
unrecognized gain, and
``(ii) the amount of such unrecognized
gain.
The Secretary may waive the requirement to report under
this subparagraph with respect to any position if such
reporting is not required to carry out the purposes of
this section.
``(3) Special rules for physically settled positions.--For
purposes of this subsection, if a taxpayer settles a position
which is part of a straddle by delivering property to which the
position relates (and such position, if terminated, would
result in a realization of a loss), then such taxpayer shall be
treated as if such taxpayer--
``(A) terminated the position for its fair market
value immediately before the settlement, and
``(B) sold the property so delivered by the
taxpayer at its fair market value.
``(b) Regulations.--The Secretary shall prescribe such regulations
with respect to gain or loss on positions which are a part of a
straddle as may be appropriate to carry out the purposes of this
section and section 263(g). To the extent consistent with such
purposes, such regulations shall include rules applying the principles
of subsections (a) and (d) of section 1091 and of subsections (b) and
(d) of section 1233 (as in effect before their repeal).
``(c) Definitions and Rules Relating to Straddles.--For purposes of
this section--
``(1) Straddle defined.--The term `straddle' means
offsetting positions with respect to applicable property.
``(2) Offsetting positions.--A taxpayer holds offsetting
positions with respect to applicable property if the taxpayer
holds any position which by itself, or in combination with 1 or
more other positions held by the taxpayer, has a delta (within
the meaning of section 492(d)(1)) with respect to any other
position held by the taxpayer which is within the range
beginning with minus 0.7 and ending with minus 1.0. For
purposes of this paragraph, positions shall be taken into
account whether or not they are in the same applicable
property.
``(3) Determination of delta.--For purposes of this
section--
``(A) Method of determination.--The delta with
respect to any position in applicable property with
respect to another position in applicable property (or
any combination of such positions) shall be determined
in the same manner as under section 492(d)(2).
``(B) Timing of delta determination and other
special rules.--Rules similar to the rules of
paragraphs (3) and (4) of section 492(d) shall apply
for purposes of this paragraph.
``(4) Applicable property and position defined.--
``(A) Applicable property.--The term `applicable
property' means any item which is--
``(i) described in paragraph (1), (2), (3),
(5), (6), (7), or (8) of section 493(a) (or any
item substantially the same as any such item),
and
``(ii) of a type which is actively traded.
``(B) Position.--
``(i) In general.--The term `position'
means an interest in applicable property.
``(ii) Derivatives excluded.--Such term
shall not include a derivative (as defined in
section 493).
``(C) Stock and debt whose value primarily
determined by reference to other items.--Except as
provided in regulations, if the taxpayer holds an item
described in paragraph (1) or (3) of section 493(a) the
value of which, or with respect to which any payment or
other transfer, is primarily determined by reference to
one or more other items described in paragraphs (1)
through (8) of section 493(a), then, solely for
purposes of this section, such item described in
paragraph (1) or (3) of section 493(a) shall also be
treated as if it were such other item.
``(5) Positions held by related persons, etc.--
``(A) In general.--In determining whether 2 or more
positions are offsetting, the taxpayer shall be treated
as holding any position held by a related party (within
the meaning of section 492(f)).
``(B) Certain pass-through entities.--If part or
all of the gain or loss with respect to a position held
by a partnership, trust, or other entity would properly
be taken into account for purposes of this chapter by a
taxpayer, then, except to the extent otherwise provided
by the Secretary, such position shall be treated as
held by the taxpayer.
``(6) Special rules for foreign currency.--
``(A) Position to include interest in certain
debt.--For purposes of paragraph (4)(B)(i), an
obligor's interest in a nonfunctional currency
denominated debt obligation is treated as a position in
the nonfunctional currency.
``(B) Actively traded requirement.--For purposes of
paragraph (4)(A)(ii), foreign currency for which there
is an active interbank market is presumed to be
actively traded.
``(d) Exception for Hedging Transactions and Investment Hedging
Units.--This section shall not apply in the case of--
``(1) any hedging transaction (as defined in section
1221(b)), and
``(2) any investment hedging unit (as defined in section
492).
``(e) Cross Reference.--For provisions requiring capitalization of
certain interest and carrying charges where there is a straddle, see
section 263(g).''.
(2) Conforming amendments.--The last sentence of section
246(c)(4) is amended--
(A) by inserting ``(as in effect before its
repeal)'' after ``section 1092(c)(4)'', and
(B) by inserting ``(as so in effect)'' after
``section 1092(f)''.
(c) Debt Instruments Held by Insurance Companies.--
(1) In general.--Subsection (a) of section 1221 is amended
by striking ``or'' at the end of paragraph (7), by striking the
period at the end of paragraph (8) and inserting ``; or'', and
by adding at the end the following:
``(9) any bond, debenture, note, or certificate or other
evidence of indebtedness held by an applicable insurance
company (as defined in subsection (b)(5)).''.
(2) Applicable insurance company.--Section 1221(b), as
amended by this Act, is amended by adding at the end the
following:
``(5) Applicable insurance company.--For purposes of
subsection (a)(9)--
``(A) In general.--The term `applicable insurance
company' means, with respect to any taxable year, an
insurance company (as defined in the last sentence of
section 816(a))--
``(i) which is subject to tax under section
801(a) or section 831(a),
``(ii) with respect to which sections
831(b), 835, and 842 do not apply, and
``(iii) which is not treated as a stock
insurance company solely by reason of section
833(a)(1).
``(B) Permanent treatment by company as ordinary
asset.--If an asset is treated as an asset described in
subsection (a)(9) with respect to any applicable
insurance company for any taxable year, such asset
shall be treated as so described during any subsequent
taxable year such asset is held by such company.''.
(3) Regulations.--Paragraph (4) of section 1221(b) is
amended--
(A) by striking ``The Secretary'' and inserting:
``(A) Related parties.--The Secretary'', and
(B) by adding at the end the following:
``(B) Assets of insurance companies.--The Secretary
shall prescribe such regulations as may be necessary or
appropriate to carry out the purposes of subsection
(a)(9), including such regulations as may be necessary
to prevent the avoidance of Federal income tax through
the sale or exchange of assets described in such
subsection.''.
(4) Effective date.--
(A) In general.--The amendments made by this
subsection shall apply to any bond, debenture, note, or
certificate or other evidence of indebtedness held or
acquired after the 90-day period beginning with the
date of the enactment of this Act.
(B) Transition rule.--If a taxpayer has a capital
loss carryover to any taxable year of the taxpayer
beginning after the close of the 90-day period
described in subparagraph (A), the taxpayer shall, in
addition to other short-term capital gain of the
taxpayer (if any), treat as short-term capital gain
(rather than as ordinary income) an amount equal to the
lesser of--
(i) the net gain (if any) from sales or
exchanges during such taxable year of assets to
which section 1221(a)(9) of such Code (as added
by paragraph (1)) applies, or
(ii) the capital loss carryovers to such
taxable year from taxable years beginning
before the close of such period.
(d) RICs Allowed Net Operating Loss Deduction.--
(1) In general.--Paragraph (2) of section 852(b) is amended
by striking subparagraph (B) and by redesignating subparagraphs
(C) through (G) as subparagraphs (B) through (F), respectively.
(2) Other modifications.--Paragraph (6) of section 172(d)
is amended to read follows:
``(6) Modifications related to rics and reits.--In the case
of any taxable year for which part I or II of subchapter M
applies to the taxpayer--
``(A) the net operating loss for such taxable year
shall be computed by taking into account--
``(i) in the case of a regulated investment
company, the adjustments described in section
852(b)(2) (other than the deduction for
dividends paid described in subparagraph (C)
thereof)), and
``(ii) in the case of a real estate
investment trust, the adjustments described in
section 857(b)(2) (other than the deduction for
dividends paid described in subparagraph (B)
thereof),
``(B) where such taxable year is a `prior taxable
year' referred to in paragraph (2) of subsection (b),
references in such paragraph to `taxable income' shall
be treated as references to--
``(i) in the case of a regulated investment
company, regulated investment company taxable
income (as defined in section 852(b)(2)), and
``(ii) in the case of a real estate
investment trust, real estate investment
taxable income (as defined in section
857(b)(2)), and
``(C) subsection (a)(2) shall be applied by
treating references to taxable income as references
to--
``(i) in the case of a regulated investment
company, regulated investment company taxable
income (as defined in section 852(b)(2)) but
without regard to the deduction for dividends
paid (as defined in section 561), and
``(ii) in the case of a real estate
investment trust, real estate investment
taxable income (as defined in section
857(b)(2)) but without regard to the deduction
for dividends paid (as defined in section
561).''.
(3) Conforming amendments.--
(A) Section 443(e)(3) is amended by striking
``section 852(b)(2)(D)'' and inserting ``section
852(b)(2)(C)''.
(B) Section 852(a)(1)(A) is amended by striking
``subsection (b)(2)(D)'' and inserting ``subsection
(b)(2)(C)''.
(C) Section 4982(e)(1)(A) is amended by striking
``and (D)'' and inserting ``and (C)''.
(4) Effective date.--The amendments made by this subsection
shall apply to net operating losses for taxable years ending
after the 90th day after the date of the enactment of this Act.
(e) Nonrecognition of Gain or Loss From Transactions by a
Corporation With Respect to Its Stock.--
(1) In general.--Section 1032 is amended to read as
follows:
``SEC. 1032. TRANSACTIONS BY A CORPORATION WITH RESPECT TO ITS STOCK.
``(a) Nonrecognition on Exchange of Stock for Property.--No gain or
loss shall be recognized to a corporation on the receipt of money or
other property in exchange for stock of such corporation.
``(b) Derivative Transactions by a Corporation With Respect to Its
Stock.--
``(1) In general.--Except as otherwise provided in this
subsection, section 1032 derivative items of a corporation
shall not be taken into account in determining such
corporation's liability for tax under this subtitle.
``(2) Income recognition on certain forward contracts.--
``(A) In general.--If--
``(i) a corporation acquires its stock, and
``(ii) such acquisition is part of a plan
(or series of related transactions) pursuant to
which the corporation enters into a forward
contract with respect to its stock,
such corporation shall include amounts in income as if
the excess of the amount to be received under the
forward contract over the fair market value of the
stock as of the date the corporation entered into the
forward contract were original issue discount on a debt
instrument acquired on such date. The preceding
sentence shall apply only to the extent that the amount
of stock involved in the forward contract does not
exceed the amount acquired as described in clause (i).
``(B) Plan presumed to exist.--If a corporation
enters into a forward contract with respect to its
stock within the 60-day period beginning on the date
which is 30 days before the date that the corporation
acquires its stock, such acquisition shall be treated
as pursuant to a plan described in subparagraph (A)(ii)
unless it is established that entering into such
contract and such acquisition are not pursuant to a
plan or series of related transactions.
``(c) Section 1032 Derivative Items.--For purposes of this section,
the term `section 1032 derivative item' means, with respect to any
corporation, any item of income, gain, loss, or deduction if--
``(1) such item arises out of the rights or obligations
under any derivative (as defined in section 493) to the extent
such derivative relates to the corporation's stock (or is
attributable to any transfer or extinguishment of any such
right or obligation), or
``(2) such item arises under any other contract or position
but only to the extent that such item reflects (or is
determined by reference to) changes in the value of such stock
or distributions thereon.
Such term shall not include any deduction with respect to which section
83(h) applies and shall not include any deduction for any item which is
in the nature of compensation for services rendered. For purposes of
this subparagraph, de minimis relationships, as determined by the
Secretary, shall be disregarded.
``(d) Coordination With Derivative and Straddle Rules.--In the case
of a derivative or other contract or position described in subsection
(c) which is held by a corporation with respect to its stock--
``(1) this section (rather than part IV of subchapter E or
section 1092) shall apply in determining the treatment of
section 1032 derivative items under this subtitle, and
``(2) such derivative or other contract or position shall
not be taken into account in determining whether the
corporation has an investment hedging unit, applicable property
interest, or straddle with respect to its stock for purposes of
such part or section.
``(e) Regulations.--The Secretary shall prescribe such regulations
or other guidance as may be appropriate to carry out the purposes of
this section, including regulations or other guidance which treat the
portion of an instrument which is described in subsection (c)(1)
separately from the portion of such instrument which is not so
described.
``(f) Basis.--For basis of property acquired by a corporation in
certain exchanges for its stock, see section 362.''.
(2) Clerical amendment.--The item relating to section 1032
in the table of sections for part III of subchapter O of
chapter 1 is amended to read as follows:
``Sec. 1032. Transactions by a corporation with respect to its
stock.''.
(3) Effective date.--The amendments made by this subsection
shall apply to transactions entered into after the date of the
enactment of this Act.
SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.
(a) Repeal of Certain Other Superceded Rules for Determining
Capital Gains and Losses.--
(1) In general.--Part IV of subchapter P of chapter 1 is
amended by striking sections 1233, 1234, 1234A, 1234B, 1236,
1256, 1258, 1259, and 1260 (and by striking the items relating
to such sections in the table of sections for such part).
(2) Conforming amendments related to repeal of section
1234.--Section 6045(h)(2) is amended--
(A) by striking ``(as defined in section
1234(b)(2)(A))'', and
(B) by adding at the end the following: ``For
purposes of the preceding sentence, the term `closing
transaction' means any termination of the taxpayer's
obligation under an option in property other than
through the exercise or lapse of the option.''.
(3) Conforming amendments related to repeal of section
1236.--
(A) Section 475(d)(3)(A) is amended by striking
``or section 1236(b)''.
(B) Section 512(b)(5) is amended by striking
``section 1236(c)'' and inserting ``section 1058(c)''.
(C) Section 1058 is amended--
(i) by striking ``(as defined in section
1236(c))'' in subsection (a), and
(ii) by redesignating subsection (c) as
subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Securities.--For purposes of this section, the term
`security' means any share of stock in any corporation, certificate of
stock or interest in any corporation, note, bond, debenture, or
evidence of indebtedness, or any evidence of an interest in or right to
subscribe to or purchase any of the foregoing.''.
(4) Conforming amendments related to repeal of section
1256.--
(A) Section 461(i)(3)(B) is amended to read as
follows:
``(B) any partnership or other entity (other than a
corporation which is not an S corporation) if more than
35 percent of the losses of such entity during the
taxable year are allocable to limited partners or
limited entrepreneurs (within the meaning of subsection
(k)(4)), and''.
(B) Section 475(d)(1) is amended by striking
``sections 263(g), 263A, and 1256(a)'' and inserting
``sections 263(g) and 263A''.
(C) Section 988(c)(1) is amended by striking
subparagraphs (D) and (E).
(D) Section 1212 is amended by striking subsection
(c).
(E) Section 1223 is amended by striking paragraphs
(7) and (14).
(F) Section 1281(b)(1)(E) is amended to read as
follows:
``(E) is part of a hedging transaction (as defined
in section 1221(b)) or an investment hedging unit (as
defined in section 492), or''.
(G) Section 1402 is amended by striking subsection
(i).
(H) Section 4982(e)(6)(B) is amended by striking
``sections 1256 and 1296'' and inserting ``sections 491
and 1296''.
(5) Conforming amendments related to repeal of section
1259.--Section 475(f)(1) is amended by striking subparagraph
(C) and by redesignating subparagraph (D) as subparagraph (C).
(b) Other Conforming Amendments.--
(1) Section 355(g)(2)(B)(i)(V) is amended to read as
follows:
``(V) any derivative (as defined in
section 493),''.
(2) Section 856(n)(4) is amended by inserting ``or
derivatives (as defined in section 493)'' after ``securities
(as defined in section 475(c)(2))''.
(3) Section 857(e)(2)(C)(i) is amended by striking
``section 860E or 1272'' and inserting ``section 491, 860E, or
1272''.
(4) Section 988(d)(1) is amended--
(A) by striking ``or 1256'' and inserting ``or
491'', and
(B) by striking ``1092, and 1256'' and inserting
``491, and 1092''.
(5) Section 1091(e) is amended to read as follows:
``(e) Coordination With Mark to Market of Derivatives and
Underlying Investments.--For purposes of this section, the term `stock
or securities' shall not include--
``(1) any derivative (as defined in section 493), or
``(2) any underlying investment (as defined in section
492(e)(1)) which, at the time of the sale or other disposition,
is part of an investment hedging unit (as defined in section
492).''.
(6)(A) Section 1221(a)(6) is amended to read as follows:
``(6) any--
``(A) derivative (as defined in section 493), or
``(B) any underlying investment (as defined in
section 492(e)(1)) which is part of an investment
hedging unit (as defined in section 492),''.
(B) Section 1221(b) is amended by striking paragraph (1).
(7) Section 4975(f)(11)(D) is amended by striking clauses
(i) and (ii) and inserting the following:
``(i) Security.--The term `security' means
any security described in section 475(c)(2)
(without regard to subparagraph (D)(iii)
thereof) and any derivative with respect to
such a security (within the meaning of section
493).
``(ii) Commodity.--The term `commodity'
means any commodity described in section
475(e)(2) (without regard to subparagraph
(B)(iii) thereof) and any derivative with
respect to such a commodity (within the meaning
of section 493).''.
(8) The table of parts for subchapter E of chapter 1 is
amended by adding at the end the following new item:
``Part IV. Tax Treatment of Derivatives and Similar Contracts''.
SEC. 5. EFFECTIVE DATES.
(a) In General.--Except as provided in this Act--
(1) the amendments made by section 2 shall apply to taxable
events occurring after the 90-day period beginning with the
date of the enactment of this Act, in taxable years ending
after the last day of such period, and
(2) the amendments made by sections 3 and 4 shall apply to
derivatives and underlying investments held after the last day
of such period.
(b) Identification Requirements.--If, as of the close of the 90-day
period described in subsection (a)(1), a taxpayer simultaneously holds
1 or more derivatives with respect to an underlying investment and the
underlying investment--
(1) the taxpayer shall make the identifications required
under section 492(c)(2) of Internal Revenue Code of 1986 (as
added by section 2 of this Act) before the close of such
period, and
(2) if such identifications result in an investment hedging
unit, the first applicable hedging period with respect to such
unit shall begin on the day after the close of such period.
(c) Definitions.--For purposes of this section, any term used in
this section which is also used in part IV of subchapter E of chapter 1
of such Code (as so added) shall have the same meaning as when used in
such part.
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