U.S. Code » Title 26 » Subtitle Subtitle A— Income Taxes › Chapter CHAPTER 1— NORMAL TAXES AND SURTAXES › Subchapter Subchapter P— Capital Gains and Losses › Part PART IV— SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES

26 U.S.C. § 1234

Options to buy or sell

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(a) Treatment of gain or loss in the case of the purchaser(1) General rule

Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).

(2) Special rule for loss attributable to failure to exercise option

For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired.

(3) Nonapplication of subsectionThis subsection shall not apply to—(A) an option which constitutes property described in paragraph (1) of section 1221(a);(B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and(C) a loss attributable to failure to exercise an option described in section 1233(c).(b) Treatment of grantor of option in the case of stock, securities, or commodities(1) General rule

In the case of the grantor of the option, gain or loss from any closing transaction with respect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 1 year.

(2) DefinitionsFor purposes of this subsection—(A) Closing transaction

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.

(B) Property

The term “property” means stocks and securities (including stocks and securities dealt with on a “when issued” basis), commodities, and commodity futures.

(3) Nonapplication of subsection

This subsection shall not apply to any option granted in the ordinary course of the taxpayer’s trade or business of granting options.

(c) Treatment of options on section 1256 contracts and cash settlement options(1) Section 1256 contracts

Gain or loss shall be recognized on the exercise of an option on a section 1256 contract (within the meaning of section 1256(b)).

(2) Treatment of cash settlement options(A) In general

For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property.

(B) Cash settlement option

For purposes of subparagraph (A), the term “cash settlement option” means any option which on exercise settles in (or could be settled in) cash or property other than the underlying property.

(Aug. 16, 1954, ch. 376, 68A Stat. 329; Pub. L. 85–866, title I, § 53, Sept. 2, 1958, 72 Stat. 1644; Pub. L. 89–809, title II, § 210(a), Nov. 13, 1966, 80 Stat. 1580; Pub. L. 94–455, title XIV, § 1402(b)(1)(U), (2), title XXI, § 2136(a), Oct. 4, 1976, 90 Stat. 1732, 1929; Pub. L. 98–369, div. A, title I, § 105(a), title X, § 1001(b)(18), (e), July 18, 1984, 98 Stat. 629, 1012; Pub. L. 106–170, title V, § 532(c)(1)(H), Dec. 17, 1999, 113 Stat. 1930.)Editorial NotesAmendments

1999—Subsec. (a)(3)(A). Pub. L. 106–170 substituted “section 1221(a)” for “section 1221”.

1984—Subsec. (b)(1). Pub. L. 98–369, § 1001(b)(18), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Subsec. (c). Pub. L. 98–369, § 105(a), added subsec. (c).

1976—Subsec. (a). Pub. L. 94–455, § 2136(a), inserted in heading “in the case of the purchaser”; designated existing provisions as par. “(1) General rule” and substituted “an option” and “the option” for “a privilege or option” and “the option or privilege”; redesignated existing subsec. (b) as par. (2) and substituted “an option” and “the option” for “a privilege or option” and “the privilege or option”; and redesignated existing subsec. (d)(1) to (3) as par. (3)(A) to (C) and substituted in heading and introductory text “Nonapplication” and “subsection” for “Non-application” and “section”, in par. (3)(A) “an option” for “a privilege or option”, in par. (3)(B) “an option”, “such option” and “subsection” for “a privilege or option”, “such privilege or option” and “section” and in par. (3)(C) substituted a period for “; or”.

Subsec. (b). Pub. L. 94–455, § 2136(a), added subsec. (b), incorporating provisions of a prior subsec. (c) providing for a special rule for grantors of straddles, par. (1) relating to “gain on lapse” and reading “In the case of gain on lapse of an option granted by the taxpayer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option expired.”; par. (2) relating to “exception” and reading “This subsection shall not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business.”, now covered in subsec. (b)(3); and par. (3) relating to definitions of “straddle” and “security”.

Subsec. (b)(1). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”.

Pub. L. 94–455, § 1402(b)(1)(U), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977.

Subsec. (c). Pub. L. 94–455, § 2136(a), struck out provision respecting special rule for grantors of straddles, the paragraphs relating to: (1) gain on lapse; (2) exception, now covered in subsec. (b)(3); and (3) definitions of “straddle” and “security”, such provision now covered generally by subsec. (b) of this section.

Subsec. (d). Pub. L. 94–455, § 2136(a), struck out provision respecting non-application of section, pars. (1) to (3) now covered in subsec. (a)(3)(A) to (C) of this section, and par. (4) providing for such non-application to gain attributable to the sale or exchange of a privilege or option acquired by the taxpayer before Mar. 1, 1954, if in the hands of the taxpayer such privilege or option was a capital asset.

1966—Subsecs. (c), (d). Pub. L. 89–809 added subsec. (c) and redesignated former subsec. (c) as (d).

1958—Pub. L. 85–866 amended section generally and among other changes provided in subsec. (a) that gain or loss resulting from option to buy or sell property is to be considered gain or loss arising from property which has the same character as the property underlying the option, incorporated existing provisions in subsecs. (b) and (c)(3), and inserted provisions set out in subsec. (c)(1), (2), (4).

Statutory Notes and Related SubsidiariesEffective Date of 1999 Amendment

Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 105(b), July 18, 1984, 98 Stat. 629, provided that: “The amendment made by subsection (a) [amending this section] shall apply to options purchased or granted after October 31, 1983, in taxable years ending after such date.”

Amendment by section 1001(b)(18) of Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date of 1976 Amendment

Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.

Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Pub. L. 94–455, title XXI, § 2136(b), Oct. 4, 1976, 90 Stat. 1930, provided that: “The amendment made by subsection (a) [amending this section] shall apply to options granted after September 1, 1976.”

Effective Date of 1966 Amendment

Pub. L. 89–809, title II, § 210(b), Nov. 13, 1966, 80 Stat. 1580, provided that: “The amendments made by subsection (a) [amending this section] shall apply to straddle transactions entered into after January 25, 1965, in taxable years ending after such date.”

Effective Date of 1958 Amendment

Amendment by Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title.

Notes of Decisions
Cited in 13 cases, 1964–1993 · leading case: William W. Saunders & Gertrude H. Saunders v. United States, 450 F.2d 1047 (9th Cir. 1971).
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William W. Saunders & Gertrude H. Saunders v. United States, 450 F.2d 1047 (9th Cir. 1971). · cites it 4× “ollowing the trial, the district court concluded that the parties intended the Special Option to be, and it in fact was, a true option and consequently that “[t]he $67,500 in net amount retained by the taxpayer of the $200,000 payment was taxable to the taxpayer as a capital…”
Louis Buddy Yosha v. Comm'r of Internal Revenue, 861 F.2d 494 (7th Cir. 1988). “See 26 U.S.C.A. § 1234 (West Supp.1984). The next step was to convert the short-term capital gain on the second “leg” of the straddle into a long-term capital gain in order to take advantage of the fact that long-term capital gains were at the time taxed at a lower rate than…”
David Dewees & Anne Dewees v. Comm'r of Internal Revenue, 870 F.2d 21 (1st Cir. 1989). “This treatment made legal sense in light of the wording of the relevant statutory provisions, see 26 U.S.C. § 1234 , but it produced an economic asymmetry that made it possible to create ordinary losses for tax purposes and offset them with capital gains.”
Herbert & Marsha Stoller v. Comm'r of Internal Revenue, 994 F.2d 855 (D.C. Cir. 1993). “See 26 U.S.C. § 1234 (A). While that amendment does not govern this case (because the transactions at issue here took place before the effective date of the amendment), the Senate Finance Committee Report on the amendment is informative with respect to the preexisting law:…”
Hugh N. Mills & Jane W. Mills v. Comm'r of Internal Revenue, 399 F.2d 744 (4th Cir. 1968). “The taxpayer also contends that he is not liable for any deficiency with respect to the transaction with Dandy because of a variance between the commissioner’s statutory notice and the theory upon which the case was tried before the tax court.”
Raymond B. Mitchell & Beverly Mitchell v. Comm'r of Internal Revenue, 590 F.2d 312 (9th Cir. 1979). “2 ) The Treasury Regulations provide guidelines for determining whether a stock *314 option has a readily ascertainable market value when granted.”
Charles B. Benenson & Dorothy Cullman v. United States, 385 F.2d 26 (2d Cir. 1967). “1960), in which we held, under what is now Section 1234 of the Code, 26 U.S.C. § 1234 , that the out-of-pocket or economic loss on a Livingstone transaction may be claimed in the year in which the transaction comes to an end as a capital loss attributable to the failure to…”
Miller v. Dep't of Treasury, 171 N.W.2d 3 (Mich. Ct. App. 1969). · cites it 2× “s for children of divorced parents, 26 USC § 152 (e) (amended August 31, 1967), Pub L 90-78, § 1, 81 Stat 191; Earned income for purpose of computing contributions of self-employed persons under qualified retirement plans, 26 USC § 401 (c)(2) (amended November 13, 1966), Pub L…”
Friedman v. Comm'r, 869 F.2d 785 (4th Cir. 1989). “26 U.S.C. § 1234 (1976). Thus § 1234(c)(1) as in effect prior to September, 1976, only addressed the character of the gain realized on the lapse of an option which had been granted as part of a straddle.”
Fraser v. Comm'r, 64 T.C. 41 (Tax Ct. 1975). · cites it 2× “In reversing, the appellate court said: As noted earlier in this opinion, the Special Option contained a defeasance proviso.”
Saunders v. United States, 294 F. Supp. 1276 (D. Haw. 1968). “The defendant’s Post-Trial Brief beginning on page 8 confuses the development of the property by the corporation formed for that purpose by erroneously implying that the development was by or for the owners’ group.”
Case v. United States, 633 F.2d 1240 (6th Cir. 1980). “26 U.S.C. § 1234 (a) accords gains or losses from “privileges ■ or options to buy” the same tax treatment as the property subject to those options.”
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