A section of the Internal Revenue Code that clarifies the transactions that are subject to capital gains taxation. Basically, any transaction that essentially offsets a previously held position is subject to the tax, even if it is not a straight sale of a security. An example of a transaction that falls under the Constructive Sale Rule is a short sale against the box.. According to this rule, transactions that effectively take an offsetting position to an already owned position are considered to be constructive sales. The purpose of the constructive sale rule is to prevent investors from locking in investment gains without paying capital gains and to limit their ability to transfer gains from one tax period to another.
This rule is Section 1259 of the Code. It is also referred to as “Constructive Sales Treatment for Appreciated Financial Positions”.
This rule was introduced by Congress in 1997. Transactions considered to be constructive sales include making short sales against similar or identical positions (known as “short sales against the box”), and entering into futures or forward contracts that call for the delivery of an already-held asset.