Title 26 — Internal Revenue Code
Part III · Chapter 1 — Normal Taxes and Surtaxes
§ 1221. Capital asset defined
Statutory text
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—
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;
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;
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—
a taxpayer whose personal efforts created such property,
in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
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);
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);
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—
a taxpayer who so received such publication, or
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);
any commodities derivative financial instrument held by a commodities derivatives dealer, unless—
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
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);
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
supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.
Definitions and special rules
Commodities derivative financial instruments
For purposes of subsection (a)(6)—
Commodities derivatives dealer
The term “commodities derivatives dealer” means a person which 1 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.
Commodities derivative financial instrument
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.
Specified index
The term “specified index” means any one or more or any combination of—
a fixed rate, price, or amount, or
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.
Hedging transaction
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—
to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,
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
to manage such other risks as the Secretary may prescribe in regulations.
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—
which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or
which was so identified but is not a hedging transaction.
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).
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.
Footnotes
- 1 So in original. Probably should be “who”.
Legislative history
Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.
Aug. 16, 1954, ch. 736, 68A Stat. 321 · 68A Stat. 321
Enacted · 26 U.S.C. § 1221
Aug. 16, 1954, ch. 736, 68A Stat. 321
Source evidence
Code source credit
Aug. 16, 1954, ch. 736, 68A Stat. 321Tax Reform Act of 1969
Pub. L. 91–172 title V § 514(a) · 83 Stat. 487
Inserted · 26 U.S.C. § 1221(3)
Pub. L. 91–172 inserted reference to a letter or memorandum
Added · 26 U.S.C. § 1221(3)
Pub. L. 91–172 added subpar. (B) dealing with a letter or memorandum
Redesignated · 26 U.S.C. § 1221(3)
Pub. L. 91–172 redesignated former subpar. (B) as (C)
Source evidence
Code amendment note
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).Enacted provision · exact public law section
(a) Treatment as Property Which Is Not a Capital Asset.— Section 1221(3) (relating to definition of capital asset) is amended to 68A Stat. 321. read as follows: “(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by— “(A) a taxpayer whose personal efforts created such property, “(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or “(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);”.Pub. L. 94–455 § 1901(c)(9) · 90 Stat. 1520
Struck · 26 U.S.C. § 1221(5)
Pub. L. 94–455, § 1901(c)(9), struck out “or Territory,” after “State”
Source evidence
Code amendment note
Par. (5). Pub. L. 94–455, § 1901(c)(9), struck out “or Territory,” after “State”.Enacted provision · exact public law section
(9) Section 1221 (5) is amended by striking out “or Territory,”. 26 USC 1221. 26 USC 2 note.Pub. L. 94–455 § 2132(a) · 90 Stat. 1520
Added · 26 U.S.C. § 1221(6)
Pub. L. 94–455, § 2132(a), added par. (6)
Source evidence
Code amendment note
Par. (6). Pub. L. 94–455, § 2132(a), added par. (6).Enacted provision · exact public law section
(a) In General.— Section 1221 (relating to definition of capital 26 USC 1221. asset) is amended by— (1) striking out “or” at the end of paragraph (4); (2) striking out the period at the end of paragraph (5) and inserting in lieu thereof “; or”, and (3) adding after paragraph (5) the following new paragraph: “(6) 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— “(A) a taxpayer who so received such publication, or “(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).”.Economic Recovery Tax Act of 1981
Pub. L. 97–34 title V § 505(a) · 95 Stat. 175
Redesignated · 26 U.S.C. § 1221(5); 26 U.S.C. § 1221(6)
Pub. L. 97–34 redesignated par. (6) as (5)
Struck · 26 U.S.C. § 1221(5); 26 U.S.C. § 1221(6)
Pub. L. 97–34 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
Source evidence
Code amendment note
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.Enacted provision · exact public law section
(a) General Rule.— Section 1221 (defining capital asset) is 26 USC 1221. amended by striking out paragraph (5) and by redesignating paragraph (6) as paragraph (5).Tax Relief Extension Act of 1999
Pub. L. 106–170 title V § 532(a) · 113 Stat. 1860
Amended · 26 U.S.C. § 1221
Pub. L. 106–170 designated existing provisions as subsec. (a)
Inserted · 26 U.S.C. § 1221
Pub. L. 106–170 inserted heading
Added · 26 U.S.C. § 1221
Pub. L. 106–170 added pars. (6) to (8) and subsec. (b)
Source evidence
Code amendment note
Pub. L. 106–170 designated existing provisions as subsec. (a), inserted heading, and added pars. (6) to (8) and subsec. (b).Enacted provision · exact public law section
(a) In General.— Section 1221 of the Internal Revenue Code 26 USC 1221. of 1986 (defining capital assets) is amended— (1) by striking “For purposes” and inserting the following: “(a) In General.— For purposes” ; (2) by striking the period at the end of paragraph (5) and inserting a semicolon; and (3) by adding at the end the following: “(6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless— “(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 “(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); “(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 “(8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer. “(b) Definitions and Special Rules.— “(1) Commodities derivative financial instruments.— For purposes of subsection (a)(6)— “(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. “(B) Commodities derivative financial instrument.— “(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. “(ii) Specified index.— The term ‘specified index’ means any one or more or any combination of— “(I) a fixed rate, price, or amount, or “(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. “(2) Hedging transaction.— “(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) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer, “(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 “(iii) to manage such other risks as the Secretary may prescribe in regulations. “(B) Regulations. Treatment of nonidentification or improper identification of hedging transaction.— Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction— “(i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or “(ii) which was so identified but is not a hedging transaction. “(3) 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.” .Pub. L. 107–16 § 542(e)(2)(A) · 115 Stat. 38
Inserted · 26 U.S.C. § 1221(a)(3)(C)
Pub. L. 107–16, § 542(e)(2)(A), inserted “(other than by reason of section 1022)” after “is determined”
Source evidence
Code amendment note
Subsec. (a)(3)(C). Pub. L. 107–16, § 542(e)(2)(A), inserted “(other than by reason of section 1022)” after “is determined”.Enacted provision · exact public law section
(A) In general.— Subparagraph (C) of section 1221(a)(3) (defining capital asset) is amended by inserting “(other than by reason of section 1022)” after “is determined”.Job Creation and Worker Assistance Act of 2002
Pub. L. 107–147 title IV § 417(20) · 116 Stat. 21
Substituted · 26 U.S.C. § 1221(b)(1)(B)(i)
Pub. L. 107–147 substituted “1256(b)))” for “1256(b))”
Source evidence
Code amendment note
Subsec. (b)(1)(B)(i). Pub. L. 107–147 substituted “1256(b)))” for “1256(b))”.Enacted provision · exact public law section
(20) Section 1221(b)(1)(B)(i) is amended by striking “1256(b))” and inserting “1256(b)))”.Pub. L. 109–222 title II § 204(a) · 120 Stat. 345
Redesignated · 26 U.S.C. § 1221(b)(3)
Pub. L. 109–222 added par. (3). Former par. (3) redesignated (4)
Target inherited from the preceding amendment note.
Source evidence
Code amendment note
Pub. L. 109–222 added par. (3). Former par. (3) redesignated (4).Enacted provision · exact public law section
(a) In General.— Subsection (b) of 26 USC 1221. section 1221 (relating to capital asset defined) is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: “(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 before January 1, 2011, by a taxpayer described in subsection (a)(3).” .Pub. L. 109–222 title II § 204(a) · 120 Stat. 345
Redesignated · 26 U.S.C. § 1221(b)(4)
Pub. L. 109–222 redesignated par. (3) as (4)
Source evidence
Code amendment note
Subsec. (b)(4). Pub. L. 109–222 redesignated par. (3) as (4).Enacted provision · exact public law section
(a) In General.— Subsection (b) of 26 USC 1221. section 1221 (relating to capital asset defined) is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: “(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 before January 1, 2011, by a taxpayer described in subsection (a)(3).” .Tax Relief and Health Care Act of 2006
Pub. L. 109–432 div. A title IV § 412(a) · 120 Stat. 2922
Struck · 26 U.S.C. § 1221(b)(3)
Pub. L. 109–432 struck out “before January 1, 2011,” after “exchanged”
Source evidence
Code amendment note
Subsec. (b)(3). Pub. L. 109–432 struck out “before January 1, 2011,” after “exchanged”.Enacted provision · exact public law section
(a) In General.— Paragraph (3) of section 1221(b) is amended by striking “before January 1, 2011,”.Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Pub. L. 111–312 title III § 301(a) · 124 Stat. 3296
Amended · 26 U.S.C. § 1221(a)(3)(C)
Pub. L. 111–312 amended subsec. (a)(3)(C) to read as if amendment by Pub. L. 107–16, § 542(e)(2)(A), had never been enacted. See 2001 Amendment note below
Source evidence
Code amendment note
Subsec. (a)(3)(C). Pub. L. 111–312 amended subsec. (a)(3)(C) to read as if amendment by Pub. L. 107–16, § 542(e)(2)(A), had never been enacted. See 2001 Amendment note below.Enacted provision · exact public law section
(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 26 USC 121, 684, 1014, 1022, 1040, 1221, 1246, 1291, 1296, 2210, 2664, 6018, 6019, 6075, 6716, 7701. is amended to read as such provision would read if such subtitle had never been enacted.Pub. L. 115–97 title I § 13314(a) · 131 Stat. 2054
Inserted · 26 U.S.C. § 1221(a)(3)
Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright” in introductory provisions
Source evidence
Code amendment note
Subsec. (a)(3). Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright” in introductory provisions.Enacted provision · exact public law section
(a) Patents, etc.— Section 1221(a)(3) is amended by inserting “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright”.Effective date note
Pub. L. 115–97, title I, § 13314(c), Dec. 22, 2017, 131 Stat. 2133, provided that: “The amendments made by this section [amending this section and section 1231 of this title] shall apply to dispositions after December 31, 2017.”
17 of 18 references resolved to an enrolled provision · 1 partial
Editorial Notes
Amendments1969–2017 · 9 rounds
2017
Subsec. (a)(3). Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright” in introductory provisions.
2010
Subsec. (a)(3)(C). Pub. L. 111–312 amended subsec. (a)(3)(C) to read as if amendment by Pub. L. 107–16, § 542(e)(2)(A), had never been enacted. See 2001 Amendment note below.
2006
Subsec. (b)(3). Pub. L. 109–432 struck out “before ,” after “exchanged”.
Pub. L. 109–222 added par. (3). Former par. (3) redesignated (4).
Subsec. (b)(4). Pub. L. 109–222 redesignated par. (3) as (4).
2002
Subsec. (b)(1)(B)(i). Pub. L. 107–147 substituted “1256(b)))” for “1256(b))”.
2001
Subsec. (a)(3)(C). Pub. L. 107–16, § 542(e)(2)(A), inserted “(other than by reason of section 1022)” after “is determined”.
1999
Pub. L. 106–170 designated existing provisions as subsec. (a), inserted heading, and added pars. (6) to (8) and 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 , 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).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Pub. L. 115–97, title I, § 13314(c), , 131 Stat. 2133, provided that: “The amendments made by this section [amending this section and section 1231 of this title] shall apply to dispositions after .”
Effective Date of 2010 Amendment
Amendment by Pub. L. 111–312 applicable to estates of decedents dying, and transfers made after , except as otherwise provided, see section 301(e) of Pub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title.
Effective Date of 2006 Amendment
Pub. L. 109–432, div. A, title IV, § 412(b), , 120 Stat. 2963, provided that: “The amendment made by this section [amending this section] shall take effect as if included in section 204 of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109–222].”
Amendment by Pub. L. 109–222 applicable to sales and exchanges in taxable years beginning after , see section 204(c) of Pub. L. 109–222, set out as a note under section 170 of this title.
Effective Date of 2001 Amendment
Amendment by Pub. L. 107–16 applicable to estates of decedents dying after , see section 542(f)(1) of Pub. L. 107–16, set out as a note under section 121 of this title.
Effective 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 , see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date of 1981 Amendment
Amendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after , in taxable years ending after such date, and applicable when so elected with respect to property held on , 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
Pub. L. 94–455, title XXI, § 2132(b), , 90 Stat. 1925, 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 [].”
Effective Date of 1969 Amendment
Pub. L. 91–172, title V, § 514(c), , 83 Stat. 643, provided that: “The amendments made by this section [amending this section and sections 341 and 1231 of this title] shall apply to sales and other dispositions occurring after .”
Credits
1954–2017 · 11 acts
- 1954Aug. 16, 1954, ch. 736, 68A Stat. 321
- 1969Pub. L. 91–172, title V, § 514(a), , 83 Stat. 643
- 1976Pub. L. 94–455, title XIX, § 1901(c)(9), title XXI, § 2132(a), , 90 Stat. 1803, 1925
- 1981Pub. L. 97–34, title V, § 505(a), , 95 Stat. 331
- 1999Pub. L. 106–170, title V, § 532(a), , 113 Stat. 1928
- 2001Pub. L. 107–16, title V, § 542(e)(2)(A), , 115 Stat. 85
- 2002Pub. L. 107–147, title IV, § 417(20), , 116 Stat. 57
- 2006Pub. L. 109–222, title II, § 204(a), , 120 Stat. 350
- 2006Pub. L. 109–432, div. A, title IV, § 412(a), , 120 Stat. 2963
- 2010Pub. L. 111–312, title III, § 301(a), , 124 Stat. 3300
- 2017Pub. L. 115–97, title I, § 13314(a), , 131 Stat. 2133.
Show as published
(Aug. 16, 1954, ch. 736, 68A Stat. 321; Pub. L. 91–172, title V, § 514(a), , 83 Stat. 643; Pub. L. 94–455, title XIX, § 1901(c)(9), title XXI, § 2132(a), , 90 Stat. 1803, 1925; Pub. L. 97–34, title V, § 505(a), , 95 Stat. 331; Pub. L. 106–170, title V, § 532(a), , 113 Stat. 1928; Pub. L. 107–16, title V, § 542(e)(2)(A), , 115 Stat. 85; Pub. L. 107–147, title IV, § 417(20), , 116 Stat. 57; Pub. L. 109–222, title II, § 204(a), , 120 Stat. 350; Pub. L. 109–432, div. A, title IV, § 412(a), , 120 Stat. 2963; Pub. L. 111–312, title III, § 301(a), , 124 Stat. 3300; Pub. L. 115–97, title I, § 13314(a), , 131 Stat. 2133.)