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Internal Revenue Code, § 1221. Capital Asset Defined

I.R.C. § 1221(a) In General
For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
I.R.C. § 1221(a)(1)
stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
I.R.C. § 1221(a)(2)
property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;
I.R.C. § 1221(a)(3)
a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
I.R.C. § 1221(a)(3)(A)
a taxpayer whose personal efforts created such property,
I.R.C. § 1221(a)(3)(B)
in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
I.R.C. § 1221(a)(3)(C)
a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);
I.R.C. § 1221(a)(4)
accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);
I.R.C. § 1221(a)(5)
a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—
I.R.C. § 1221(a)(5)(A)
a taxpayer who so received such publication, or
I.R.C. § 1221(a)(5)(B)
a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);
I.R.C. § 1221(a)(6)
any commodities derivative financial instrument held by a commodities derivatives dealer, unless—
I.R.C. § 1221(a)(6)(A)
it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and
I.R.C. § 1221(a)(6)(B)
such instrument is clearly identified in such dealer's records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);
I.R.C. § 1221(a)(7)
any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or
I.R.C. § 1221(a)(8)
supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.
I.R.C. § 1221(b) Definitions And Special Rules
I.R.C. § 1221(b)(1) Commodities Derivative Financial Instruments
For purposes of subsection (a)(6)—
I.R.C. § 1221(b)(1)(A) Commodities Derivatives Dealer
The term “commodities derivatives dealer” means a person which regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.
I.R.C. § 1221(b)(1)(B) Commodities Derivative Financial Instrument
I.R.C. § 1221(b)(1)(B)(i) In General
The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.
I.R.C. § 1221(b)(1)(B)(ii) Specified Index
The term “specified index” means any one or more or any combination of—
I.R.C. § 1221(b)(1)(B)(ii)(I)
a fixed rate, price, or amount, or
I.R.C. § 1221(b)(1)(B)(ii)(II)
a variable rate, price, or amount,
which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties' circumstances.
I.R.C. § 1221(b)(2) Hedging Transaction
I.R.C. § 1221(b)(2)(A) In General
For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer's trade or business primarily—
I.R.C. § 1221(b)(2)(A)(i)
to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,
I.R.C. § 1221(b)(2)(A)(ii)
to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or
I.R.C. § 1221(b)(2)(A)(iii)
to manage such other risks as the Secretary may prescribe in regulations.
I.R.C. § 1221(b)(2)(B) Treatment Of Nonidentification Or Improper Identification Of Hedging Transactions
Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—
I.R.C. § 1221(b)(2)(B)(i)
which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or
I.R.C. § 1221(b)(2)(B)(ii)
which was so identified but is not a hedging transaction.
I.R.C. § 1221(b)(3) Sale Or Exchange Of Self-Created Musical Works
At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).
I.R.C. § 1221(b)(4) Regulations
The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.
(Aug. 16, 1954, ch. 736, 68A Stat. 321; Dec. 30, 1969, Pub. L. 91-172, title V, 514(a), 83 Stat. 643; Oct. 4, 1976, Pub. L. 94-455, title XIX, 1901(c)(9), title XXI, 2132(a), 90 Stat. 1803, 1925; Aug. 13, 1981, Pub. L. 97-34, title V, 505(a), 95 Stat. 331; Dec. 17, 1999, Pub. L. 106-170, title V, 532(a), 113 Stat. 1860; June 7, 2001, Pub. L. 107-16, title V, Sec. 542, 115 Stat. 38; Mar. 9, 2002, Pub. L. 107-147, title IV, Sec. 417(20), 116 Stat. 21; May 17, 2006, Pub. L. 109-222, title II, Sec. 204(a), 120 Stat. 345; Dec. 20, 2006, Pub. L. 109-432, div. A, title IV, Sec. 412(a), 120 Stat. 2922; Pub. L. 111-312, title III, Sec. 301(a), Dec. 17, 2010, 124 Stat. 3296; Pub. L. 115-97, title I, Sec. 13314(a), Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
AMENDMENTS
2017--Subsec. (a)(3). Pub. L. 115-97, Sec. 13314(a), amended par. (3) by inserting “a patent, invention, model or design (whether or not patented), a secret formula or process,” before ‘‘a copyright’’.
2010--Subsec. (a)(3)(C). Pub. L. 111-312, Sec. 301(a), amended Sec. 1221(a)(3)(C) to read as it would read if subtitle E of title V of Pub. L. 107-16 had never been enacted. Sec. 1221(a)(3)(C), as amended by Pub. L. 107-16, Sec. 542(e)(2), would have read as follows:
“(C) a taxpayer in whose hands the basis of such property is determined (other than by reason of section 1022), for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);”.
2006—Subsec. (b)(3). Pub. L. 109-432, Sec. 412(a), amended par. (3) by striking “before January 1, 2011”.
Subsec. (b)(3). Pub. L. 109-222, Sec. 204(a), redesignated par. (3) as par. (4) and added a new par. (3).
2002—Subsec. (b)(1)(B)(i). Pub. L. 107-147, Sec. 417(20), amended clause (i) by substituting “1256)))” for “1256))”.
2001--Subsec. (a)(3)(C). Pub. L. 107-16, Sec. 542(e)(2), amended subpar. (C) by inserting “(other than by reason of section 1022)” after “is determined”.
1999--Section 1221. Pub. L. 106-170, Sec. 532(a) inserted “(a) In General.--For purposes” for “For purposes”.
Subsec. (a)(5). Pub. L. 106-170 substituted at the end of paragraph (5) a “;" for a “.”.
Subsec. (a)(6)-(8). Pub. L. 106-170, Sec. 532(a), added new paragraphs (6)-(8).
Subsec. (b). Pub. L. 106-170, Sec. 532(a), added subsec. (b).
1981--Pars. (5), (6). Pub. L. 97-34 redesignated par. (6) as (5) and struck out former par. (5), which excluded from definition of “capital asset” an obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, and is covered by section 1232(a)(4)(B) of this title.
1976--Par. (5). Pub. L. 94-455, 1901(c)(9), struck out “or Territory,” after “State”.
Par. (6). Pub. L. 94-455, 2132(a), added par. (6).
1969--Par. (3). Pub. L. 91-172 inserted reference to a letter or memorandum, added subpar. (B) dealing with a letter or memorandum, and redesignated former subpar. (B) as (C).
EFFECTIVE DATE OF 2017 AMENDMENT
Amendment by Pub. L. 115-97, Sec. 13314(a), effective for dispositions after December 31, 2017.
EFFECTIVE DATE OF 2010 AMENDMENT
Amendment by Sec. 301(a) of Pub. L. 111-312 effective for estates of decedents dying, and transfers made, after December 31, 2009. Section 304 of Pub. L. 111-312, which was struck by Pub. L. 112-240, Sec. 101(a)(2), provided the following sunset provision:
“SEC. 304. APPLICATION OF EGTRRA SUNSET TO THIS TITLE. Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall apply to the amendments made by this section.”
REINSTATEMENT OF ESTATE TAX; REPEAL OF CARRYOVER BASIS
Section 301 of Pub. L. 111-312 provided:
“(a) IN GENERAL.—Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.
“(b) CONFORMING AMENDMENT.—On and after January 1, 2011, paragraph (1) of section 2505(a) of the Internal Revenue Code of 1986 is amended to read as such paragraph would read if section 521(b)(2) of the Economic Growth and Tax Relief Reconciliation Act of 2001 had never been enacted.
“(c) SPECIAL ELECTION WITH RESPECT TO ESTATES OF DECEDENTS DYING IN 2010.—Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary's delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary's delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.
“(d) EXTENSION OF TIME FOR PERFORMING CERTAIN ACTS.—
“ (1) ESTATE TAX.—In the case of the estate of a decedent dying after December 31, 2009, and before the date of the enactment of this Act, the due date for—
“(A) filing any return under section 6018 of the Internal Revenue Code of 1986 (including any election required to be made on such a return) as such section is in effect after the date of the enactment of this Act without regard to any election under subsection (c),
“(B) making any payment of tax under chapter 11 of such Code, and
“(C) making any disclaimer described in section 2518(b) of such Code of an interest in property passing by reason of the death of such decedent, shall not be earlier than the date which is 9 months after the date of the enactment of this Act.
“(2) GENERATION-SKIPPING TAX.—In the case of any generation-skipping transfer made after December 31, 2009, and before the date of the enactment of this Act, the due date for filing any return under section 2662 of the Internal Revenue Code of 1986 (including any election required to be made on such a return) shall not be earlier than the date which is 9 months after the date of the enactment of this Act.
“(e) EFFECTIVE DATE.—Except as otherwise provided in this section, the amendments made by this section shall apply to estates of decedents dying, and transfers made, after December 31, 2009.”
EFFECTIVE DATE OF 2006 AMENDMENTS
Amendment by Sec. 412(a) of Pub. L. 109-432 applicable as if included in section 204 of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109-222].
Amendments by Sec. 204(a) of Pub. L. 109-222 applicable to sales and exchanges in taxable years beginning after the date of the enactment of this Act [Enacted: May 17, 2006].
EFFECTIVE DATE OF 2002 AMENDMENT
Amendment by Sec. 417(20) of Pub. L. 107-147 applicable on the date of the enactment of this Act [enacted: Mar. 9, 2002].
EFFECTIVE DATE OF 2001 AMENDMENTS
Amendment by Sec. 542(e)(2) of Pub. L. 107-16 shall apply to estates of decedents dying after December 31, 2009.
Section 901 (Sunset of Provisions of Act) of Pub. L. 107-16, as amended by Pub. L. 107-358 and Pub. L. 111-312, Sec. 101(a), and struck by Pub. L. 112-240, Sec. 101(a)(1) (effective for taxable, plan, or limitation years beginning after Dec. 31, 2012, and estates of decedents dying, gifts made, or generation skipping transfers after Dec. 31, 2012), provided that:
“(a) IN GENERAL.--All provisions of, and amendments made by, this Act shall not apply--
“(1) to taxable, plan, or limitation years beginning after December 31, 2012, or
“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2012.
“(b) APPLICATION OF CERTAIN LAWS.--The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.
“(c) EXCEPTION.-Subsection (a) shall not apply to section 803 (relating to no federal income tax on restitution received by victims of the Nazi regime or their heirs or estates).”
EFFECTIVE DATE OF 1999 AMENDMENTS
Amendments by Sec. 532(a) of Pub. L. 106-170 shall apply to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after the enactment date of this Act [Enacted: Dec. 17, 1999].
EFFECTIVE DATE OF 1981 AMENDMENT
Amendment by Pub. L. 97-34 applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of Pub. L. 97-34, set out as an Effective Date note under section 1092 of this title.
EFFECTIVE DATE OF 1976 AMENDMENT
Section 2132(b) of Pub. L. 94-455 provided that: “The amendment made by subsection (a) [amending this section] shall apply to sales, exchanges, and contributions made after the date of enactment of this Act [Oct. 4, 1976].”
EFFECTIVE DATE OF 1969 AMENDMENT
Section 514(c) of Pub. L. 91-172 provided that: “The amendments made by this section [amending sections 341, 1221, and 1231 of this title] shall apply to sales and other dispositions occurring after July 25, 1969.”