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Section 1259

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Section 1259 is a portion of the federal tax code covering several types of transactions that are to be treated as sales subject to capital gains taxes (i.e. constructive sale rule). Under section 1259, a transaction is defined as a constructive sale if it offsets an investment in an owned position. For instance, investors who sell short a stock they already hold long, or buy futures on an asset already held, have made a constructive sale according to section 1259. However, there are a few exceptions to section 1259. For example, investors who hold the original position for 60 days after they close the offsetting position are exempt from section 1259. Another exception include investors who realize a gain from an offsetting position are also exempt from section 1259 if they close the position within the first 30 days of January following the year the gain was achieved. Congress enacted section 1259 in 1997 to prevent investors from avoiding the capital gain tax, and to limit the transfer of gains to future tax periods.



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