Modernization of Derivatives Tax Act of 2021
This bill modifies the tax treatment of derivatives. A derivative is any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to another specified item.
The bill modifies the tax treatment of derivatives to (1) require mark to market treatment (treating the contracts as if they had been terminated or transferred at fair market value at the end of the year) for derivatives not terminated or transferred during the year, (2) require gains and losses to be taxed at ordinary tax rates and sourced to the taxpayer's country of residence, and (3) revise the reporting requirements and tax rules that apply to taxpayers that use derivatives to hedge capital assets.
The bill includes several exceptions for
To amend the Internal Revenue Code of 1986 to modernize the tax 
  treatment of derivatives and their underlying investments, and for 
                            other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``Modernization of 
Derivatives Tax Act of 2021''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. MODERNIZATION OF TAX TREATMENT OF CERTAIN DERIVATIVES.

    (a) In General.--Subchapter E of chapter 1 is amended by adding at 
the end the following new part:

     ``PART IV--TAX TREATMENT OF DERIVATIVES AND SIMILAR CONTRACTS

                        ``subpart a. derivatives

                     ``subpart b. similar contracts

                        ``Subpart A--Derivatives

``Sec. 491. Rules for treatment of derivatives.
``Sec. 492. Investment hedging units.
``Sec. 493. Derivative defined.

``SEC. 491. RULES FOR TREATMENT OF DERIVATIVES.

    ``(a) In General.--For purposes of this title, if there is a 
taxable event with respect to a derivative or an underlying 
investment--
            ``(1) notwithstanding any other provision of this title, 
        except as provided in subsection (b)(3)(A) or section 1032, 
        gain or loss shall be recognized and taken into account in the 
        taxable year in which the taxable event occurs, and
            ``(2) proper adjustment shall be made in the amount of any 
        subsequent gain or loss for gain or loss taken into account by 
        reason of paragraph (1).
    ``(b) Rules Relating to Gain or Loss.--Notwithstanding any other 
provision of this title--
            ``(1) Character and source of gain or loss.--
                    ``(A) Character.--Except as provided in paragraph 
                (3)(A), any item of income, deduction, gain, or loss 
                taken into account under subsection (a) with respect to 
                a taxable event shall be treated as--
                            ``(i) ordinary income or loss, and
                            ``(ii) attributable to a trade or business 
                        of the taxpayer for purposes of sections 62(a) 
                        and 172(d)(4).
                    ``(B) Source of gain or loss from derivatives.--In 
                the case of a taxable event with respect to a 
                derivative, any item of income, deduction, gain, or 
                loss taken into account under subsection (a) shall be 
                treated as derived from sources within the country of 
                residence, incorporation, or organization of the 
                taxpayer.
            ``(2) Determination of amount.--
                    ``(A) In general.--The amount of gain or loss taken 
                into account under subsection (a) with respect to a 
                taxable event shall be--
                            ``(i) in the case of a taxable event 
                        involving the termination or transfer of a 
                        derivative or the sale or exchange of an 
                        underlying investment, the amount of gain or 
                        loss determined under this title with respect 
                        to the taxable event, or
                            ``(ii) in the case of any other taxable 
                        event, the amount of gain or loss which would 
                        be determined under this title if, immediately 
                        before the taxable event--
                                    ``(I) in the case of a derivative, 
                                the derivative were terminated or 
                                transferred at its fair market value, 
                                or
                                    ``(II) in the case of an underlying 
                                investment, the investment were sold or 
                                exchanged at its fair market value.
                    ``(B) Reliance on valuation.--For purposes of 
                subparagraph (A), the taxpayer may rely on a valuation 
                which is--
                            ``(i) provided to the taxpayer by a broker 
                        under section 6045(b), or
                            ``(ii) determined under an applicable 
                        financial statement.
            ``(3) Special rules for taxable events with respect to 
        investment hedging units.--
                    ``(A) In general.--In the case of a taxable event 
                described in subsection (c)(2) with respect to a 
                derivative or underlying investment (other than a 
                termination or transfer of the derivative or the sale 
                or exchange of the underlying investment)--
                            ``(i) notwithstanding subsection (a), 
                        built-in loss (if any) with respect to the 
                        derivative or underlying investment shall not 
                        be recognized and shall not be taken into 
                        account by reason of such taxable event, and
                            ``(ii) notwithstanding paragraph (1), 
                        built-in gain (if any) with respect to the 
                        underlying investment shall be treated as long-
                        term or short-term capital gain if the built-in 
                        gain would have been so treated if the 
                        investment were sold or exchanged at its fair 
                        market value immediately before the time that 
                        the built-in gain is determined under 
                        subparagraph (D).
                    ``(B) Identification.--For purposes of this 
                paragraph, the determination of which portions of an 
                underlying investment have been deemed sold or 
                exchanged in a taxable event shall be made in the same 
                manner as if there had been an actual sale or exchange.
                    ``(C) Built-in loss.--For purposes of this section, 
                the term `built-in loss' means, with respect to any 
                derivative or underlying investment in an investment 
                hedging unit, any loss which would have been recognized 
                and taken into account under subsection (a) if the 
                derivative were terminated or transferred, or the 
                underlying investment were sold or exchanged, at its 
                fair market value as of the later of the time that the 
                investment hedging unit was established or the time 
                that the derivative or the underlying investment became 
                part of the investment hedging unit.
                    ``(D) Built-in gain.--For purposes of this section, 
                the term `built-in gain' means, with respect to any 
                underlying investment in an investment hedging unit, 
                any gain which would have been recognized and taken 
                into account under subsection (a) if the underlying 
                investment were sold or exchanged at its fair market 
                value as of the later of the time that the investment 
                hedging unit was established or the time that the 
                underlying investment became part of the investment 
                hedging unit.
    ``(c) Taxable Event.--For purposes of this part, the term `taxable 
event' means--
            ``(1) with respect to any derivative which is not part of 
        an investment hedging unit--
                    ``(A) the termination or transfer of such 
                derivative, and
                    ``(B) the close of any taxable year if the taxpayer 
                has rights or obligations with respect to such 
                derivative at such time, and
            ``(2) with respect to all derivatives and underlying 
        investments which are part of the same investment hedging 
        unit--
                    ``(A) the establishment of the investment hedging 
                unit,
                    ``(B) the termination or transfer of any such 
                derivative,
                    ``(C) the sale or exchange of all or any portion of 
                any such underlying investment,
                    ``(D) the entering into of another derivative, or 
                the acquisition of an additional amount of such 
                underlying investment, after the establishment of the 
                investment hedging unit if such derivative or 
                additional amount is treated as part of the investment 
                hedging unit under section 492, and
                    ``(E) in the case of--
                            ``(i) an investment hedging unit with 
                        respect to which an election is in effect under 
                        section 492(b), the close of each business day, 
                        and
                            ``(ii) any other investment hedging unit, 
                        the close of any taxable year if the applicable 
                        hedging period with respect to such unit 
                        includes such close.
            ``(3) Termination or transfer.--For purposes of this part, 
        the term `termination or transfer' includes, with respect to 
        any derivative, any termination or transfer by offsetting, by 
        taking or making delivery, by exercise or being exercised, by 
        assignment or being assigned, by lapse, by sale or other 
        disposition, by assumption, or otherwise.
    ``(d) Treatment of Payments With Respect to Certain Derivatives.--
Notwithstanding any other provision of this title--
            ``(1) In general.--Except as provided by the Secretary, in 
        the case of a payment pursuant to a derivative (other than an 
        option)--
                    ``(A) any item of income, deduction, gain, or loss 
                with respect to the payment shall be taken into account 
                for purposes of this title at the time of the payment, 
                and
                    ``(B) proper adjustment shall be made in the amount 
                of any subsequent gain or loss for items taken into 
                account by reason of subparagraph (A).
        This paragraph shall not apply to a payment in connection with 
        a taxable event.
            ``(2) Rules relating to character and source of gain or 
        loss.--In the case of any item of income, deduction, gain, or 
        loss with respect to payments described in paragraph (1)--
                    ``(A) the rules of subsection (b)(1)(A) shall apply 
                in determining the character of such item, and
                    ``(B) except as provided in section 871(m), the 
                rule of subsection (b)(1)(B) shall apply in determining 
                the source of such item.
    ``(e) Suspension of Holding Period While Underlying Investment Part 
of Investment Hedging Unit.--For purposes of section 1222, in the case 
of any underlying investment which is part of an investment hedging 
unit, the holding period for such investment shall not include any 
period during which the underlying investment is part of such unit.
    ``(f) Applicable Financial Statement.--For purposes of this part, 
the term `applicable financial statement' means--
            ``(1) a financial statement which is certified as being 
        prepared in accordance with generally accepted accounting 
        principles and which is--
                    ``(A) a 10-K (or successor form), or annual 
                statement to shareholders, required to be filed by the 
                taxpayer with the United States Securities and Exchange 
                Commission,
                    ``(B) an audited financial statement of the 
                taxpayer which is used for--
                            ``(i) credit purposes,
                            ``(ii) reporting to shareholders, partners, 
                        or other proprietors, or to beneficiaries, or
                            ``(iii) any other substantial nontax 
                        purpose,
                but only if there is no statement of the taxpayer 
                described in subparagraph (A), or
                    ``(C) filed by the taxpayer with any other Federal 
                agency for purposes other than Federal tax purposes, 
                but only if there is no statement of the taxpayer 
                described in subparagraph (A) or (B),
            ``(2) a financial statement which is made on the basis of 
        international financial reporting standards and is filed by the 
        taxpayer with an agency of a foreign government which is 
        equivalent to the United States Securities and Exchange 
        Commission and which has reporting standards not less stringent 
        than the standards required by such Commission, but only if 
        there is no statement of the taxpayer described in paragraph 
        (1), or
            ``(3) a financial statement filed by the taxpayer with any 
        other regulatory or governmental body specified by the 
        Secretary, but only if there is no statement of the taxpayer 
        described in paragraph (1) or (2).

``SEC. 492. INVESTMENT HEDGING UNITS.

    ``(a) Investment Hedging Unit.--For purposes of this part--
            ``(1) In general.--Except as provided in subsection (b)--
                    ``(A) a taxpayer shall be treated as having an 
                investment hedging unit with respect to an underlying 
                investment during any applicable hedging period with 
                respect to the underlying investment, and
                    ``(B) subject to paragraph (3), such investment 
                hedging unit shall at any time during the applicable 
                hedging period consist of the following held by the 
                taxpayer at such time:
                            ``(i) Each derivative with respect to the 
                        underlying investment which has a delta with 
                        respect to any portion of the underlying 
                        investment which is within the range beginning 
                        with minus 0.7 and ending with minus 1.0.
                            ``(ii) Each portion of the underlying 
                        investment described in clause (i) with respect 
                        to which any derivative has a delta within the 
                        range described in clause (i).
            ``(2) Applicable hedging period.--The term `applicable 
        hedging period' means, with respect to any underlying 
        investment of a taxpayer, a continuous period--
                    ``(A) beginning with the first time (after a period 
                which is not an applicable hedging period) the taxpayer 
                holds 1 or more of the derivatives with respect to the 
                underlying investment, and 1 or more portions of the 
                underlying investment, which are described in paragraph 
                (1)(B), and
                    ``(B) ending with the time none of such derivatives 
                and portions are so described.
            ``(3) Special rules relating to delta and combining 
        derivatives.--
                    ``(A) In general.--For purposes of this 
                subsection--
                            ``(i) a derivative with respect to an 
                        underlying investment shall be treated as 
                        having a delta within the range described in 
                        paragraph (1)(B)(i) if the derivative by 
                        itself, or in combination with 1 or more other 
                        derivatives, has such delta with respect to any 
                        portion of such underlying investment, and
                            ``(ii) the determination under paragraph 
                        (1)(B) of which derivatives have such delta, 
                        and each portion of the underlying investment 
                        with respect to which such derivatives have 
                        such delta, shall be made in the manner which 
                        results in the largest portion of such 
                        underlying investment being so described.
                    ``(B) Secretarial authority for applicable traded 
                derivatives.--The Secretary may prescribe regulations 
                or other guidance to modify the rules under 
                subparagraph (A) to simplify the application of such 
                rules to applicable traded derivatives.
            ``(4) Applicable traded derivatives.--For purposes of 
        paragraph (3)--
                    ``(A) In general.--The term `applicable traded 
                derivative' means any listed option or regulated 
                futures contract.
                    ``(B) Regulated futures contract.--The term 
                `regulated futures contract' means a contract--
                            ``(i) with respect to which the amount 
                        required to be deposited and the amount which 
                        may be withdrawn depends on a system of marking 
                        to market, and
                            ``(ii) which is traded on (or subject to 
                        the rules of) a qualified board or exchange.
                    ``(C) Listed option.--The term `listed option' 
                means any option (other than a right to acquire stock 
                from the issuer) which is traded on (or subject to the 
                rules of) a qualified board or exchange.
                    ``(D) Qualified board or exchange.--The term 
                `qualified board or exchange' means--
                            ``(i) a national securities exchange which 
                        is registered with the Securities and Exchange 
                        Commission,
                            ``(ii) a domestic board of trade designated 
                        as a contract market by the Commodity Futures 
                        Trading Commission, or
                            ``(iii) any other exchange, board of trade, 
                        or other market which the Secretary determines 
                        has rules adequate to carry out the purposes of 
                        this part.
    ``(b) Election With Respect to Items Included in Investment Hedging 
Unit.--
            ``(1) In general.--For purposes of this part, a taxpayer 
        may elect to treat all derivatives with respect to an 
        underlying investment, and all of such underlying investment, 
        as part of an investment hedging unit.
            ``(2) Election.--Any election under this subsection with 
        respect to an underlying investment--
                    ``(A) shall apply to all derivatives with respect 
                to such underlying investment, and all of such 
                underlying investment, held at any time after the 
                election is made (including during any period such 
                derivatives or underlying investment are not held 
                simultaneously), and
                    ``(B) shall be irrevocable.
            ``(3) Deemed election for taxpayers failing to identify.--
                    ``(A) In general.--If a taxpayer--
                            ``(i) does not have an election in effect 
                        under paragraph (1) with respect to an 
                        underlying investment, and
                            ``(ii) fails to meet the requirements of 
                        subsection (c) for testing and identifying 
                        derivatives with respect to the underlying 
                        investment,
                the taxpayer shall be treated as having made the 
                election under paragraph (1).
                    ``(B) Treatment of election.--For purposes of 
                paragraph (2), a deemed election under this paragraph--
                            ``(i) shall be treated as made as of the 
                        first time the taxpayer fails to meet the 
                        requirements of subsection (c) with respect to 
                        the underlying investment, and
                            ``(ii) notwithstanding paragraph (2)(B), 
                        may be revoked with the consent of the 
                        Secretary.
    ``(c) Definitions and Rules Relating to Taxpayers Identifying 
Investment Hedging Units.--In the case of a taxpayer with respect to 
which an election is not in effect under subsection (b) with respect to 
an underlying investment--
            ``(1) In general.--The taxpayer shall, at the times 
        described in paragraph (3), test the derivatives with respect 
        to the underlying investment and make the identifications 
        described in paragraph (2).
            ``(2) Identification.--
                    ``(A) In general.--The taxpayer shall identify the 
                following with respect to an underlying investment:
                            ``(i) Each derivative described in 
                        subsection (a)(1)(B)(i).
                            ``(ii) Each portion of the underlying 
                        investment described in subsection 
                        (a)(1)(B)(ii).
                    ``(B) Derivatives and underlying investment not 
                part of investment hedging unit.--A taxpayer shall 
                identify the derivatives with respect to an underlying 
                investment, and the portions of the underlying 
                investment, which are not required to be identified 
                under subparagraph (A).
                    ``(C) Portion may include all of underlying 
                investment.--For purposes of this part, the term 
                `portion' with respect to any underlying investment 
                identified may include all of the underlying 
                investment.
            ``(3) Times identifications required to be made.--
                    ``(A) In general.--The taxpayer shall test and make 
                the identifications required under this subsection at 
                the following times during any continuous period the 
                taxpayer simultaneously holds 1 or more derivatives 
                with respect to an underlying investment and 1 or more 
                portions of the underlying investment:
                            ``(i) The beginning of the period.
                            ``(ii) Immediately after the taxpayer 
                        (during such period)--
                                    ``(I) enters into another 
                                derivative with respect to the 
                                underlying investment or acquires an 
                                additional amount of such underlying 
                                investment, or
                                    ``(II) terminates or transfers 1 or 
                                more derivatives with respect to the 
                                underlying investment or sells or 
                                exchanges any portion of the underlying 
                                investment, except that no testing and 
                                identification shall be required under 
                                this subclause with respect to any such 
                                transaction if the taxpayer does not 
                                have an investment hedging unit with 
                                respect to the underlying investment 
                                immediately before such transaction.
                            ``(iii) Such other times during such period 
                        as the Secretary may prescribe by regulations 
                        or other guidance.
                    ``(B) No other times for testing.--Except as 
                provided by the Secretary, there shall not be taken 
                into account for purposes of this part any testing and 
                identification done by the taxpayer with respect to an 
                underlying investment at a time other than the times 
                required under subparagraph (A).
            ``(4) Manner.--A taxpayer shall be treated as timely making 
        the identifications required under this subsection if the 
        derivatives with respect to, and each portion of, an underlying 
        investment are clearly identified as part of (or as not part 
        of) the investment hedging unit for purposes of this paragraph 
        before the close of the day on which the identification is 
        required (or such other time as the Secretary may prescribe).
            ``(5) Treatment of incorrect identification.--The Secretary 
        shall prescribe regulations or other guidance to properly 
        characterize any income, gain, expense, or loss arising from 
        any derivative or underlying investment which is incorrectly 
        identified under paragraph (2) as being part of, or not being 
        part of, an investment hedging unit.
    ``(d) Delta.--For purposes of this section--
            ``(1) In general.--The term `delta' means, with respect to 
        any derivative and underlying investment, the ratio of the 
        expected change in the fair market value of the derivative to a 
        very small change in the fair market value of the underlying 
        investment.
            ``(2) Method of determination.--The delta with respect to 
        any derivative with respect to an underlying investment (or any 
        combination of such derivatives) shall be determined--
                    ``(A) in a commercially reasonable manner, and
                    ``(B) except as provided by the Secretary, in a 
                manner which is consistent with the manner used by the 
                taxpayer or the taxpayer's broker for purposes of an 
                applicable financial statement.
            ``(3) Time for making determination.--The delta with 
        respect to any derivative and underlying investment shall be 
        determined as of any date the taxpayer is required to make the 
        identifications described in subsection (c).
            ``(4) Multiple underlying investments.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), if the value of a derivative is 
                determined by reference to more than 1 underlying 
                investment, the delta shall be determined separately 
                with respect to each underlying investment.
                    ``(B) Methods for combinations of underlying 
                investments.--The Secretary may provide methods for 
                determining the delta of any derivative with respect to 
                combinations of 2 or more underlying investments.
    ``(e) Other Definitions and Rules.--For purposes of this part--
            ``(1) Underlying investment.--
                    ``(A) In general.--The term `underlying investment' 
                means, with respect to any derivative, any item--
                            ``(i) which is described in any of the 
                        paragraphs (1) through (8) of section 493(a) 
                        (or any item substantially the same as any such 
                        item), and
                            ``(ii) by reference to which the value of 
                        the derivative, or any payment or other 
                        transfer with respect to the derivative, is 
                        determined either directly or indirectly.
                    ``(B) Coordination with section 475.--In the case 
                of a dealer in securities to which section 475 applies 
                (and a dealer in commodities with respect to which an 
                election is in effect under section 475(e)), such term 
                shall not include any item which, but for this 
                subparagraph, would be treated as an underlying 
                investment if such item is treated as a security under 
                section 475 (including a commodity treated as a 
                security under section 475(e)).
                    ``(C) Indirect determinations.--For purposes of 
                subparagraph (A)(ii), the value of, or any payment or 
                other transfer with respect to, a derivative shall not 
                be treated as indirectly determined by reference to one 
                or more of the items described in paragraphs (1) 
                through (8) of section 493(a) solely because the change 
                in a variable affecting such value, payment, or other 
                transfer also affects the value, level, amount, or 
                calculation of such item or items.
            ``(2) Establishment of investment hedging unit.--A taxpayer 
        shall be treated as having established an investment hedging 
        unit with respect to an underlying investment--
                    ``(A) in the case of a taxpayer with an election in 
                effect under subsection (b) with respect to the 
                underlying investment, as of the date the election 
                takes effect, and
                    ``(B) in the case of any other taxpayer, as of the 
                beginning of each applicable hedging period with 
                respect to the underlying investment.
            ``(3) Related parties, etc.--For purposes of this section--
                    ``(A) Attribution between related persons.--Any 
                derivative or underlying investment held by a related 
                party (within the meaning of subsection (f)) with 
                respect to the taxpayer shall be treated as held by the 
                taxpayer.
                    ``(B) Certain pass-through entities.--If part or 
                all of the income, gain, loss, or expense with respect 
                to a derivative or underlying investment held by a 
                partnership, trust, or other entity would properly be 
                taken into account for purposes of this chapter by the 
                taxpayer, then, except to the extent otherwise provided 
                by the Secretary, such derivative or investment shall 
                be treated as held by the taxpayer.
                    ``(C) Stock and debt whose value primarily 
                determined by reference to other items.--Except as 
                provided by the Secretary, if the taxpayer holds an 
                item described in paragraph (1) or (3) of section 
                493(a) the value of which, or with respect to which any 
                payment or other transfer, is primarily determined by 
                reference to one or more other items described in 
                paragraphs (1) through (8) of section 493(a), then, 
                solely for purposes of this subpart, such item 
                described in paragraph (1) or (3) of section 493(a) 
                shall also be treated as if it were such other item.
    ``(f) Related Party.--For purposes of this section--
            ``(1) In general.--A person is a related party to the 
        taxpayer if, with respect to any period during which a 
        derivative or underlying investment is held by such person, 
        such person--
                    ``(A) is the taxpayer's spouse,
                    ``(B) is a dependent of the taxpayer or any other 
                taxpayer with respect to whom the taxpayer is a 
                dependent,
                    ``(C) is an individual, corporation, partnership, 
                trust, or estate which controls, or is controlled by 
                (within the meaning of section 954(d)(3)), the taxpayer 
                or any individual described in subparagraph (A) or (B) 
                with respect to the taxpayer (or any combination 
                thereof),
                    ``(D) is an individual retirement plan, Archer MSA 
                (as defined in section 220(d)), or health savings 
                account (as defined in section 223(d)), of the taxpayer 
                or of any individual described in subparagraph (A) or 
                (B) with respect to the taxpayer,
                    ``(E) is an account under a qualified tuition 
                program described in section 529, an ABLE account (as 
                defined in section 529A(e)(6)), or a Coverdell 
                education savings account (as defined in section 
                530(b)) if the taxpayer, or any individual described in 
                subparagraph (A) or (B) with respect to the taxpayer, 
                is the designated beneficiary of such account or has 
                the right to make any decision with respect to the 
                investment of any amount in such account,
                    ``(F) is an account under--
                            ``(i) a plan described in section 401(a),
                            ``(ii) an annuity plan described in section 
                        403(a),
                            ``(iii) an annuity contract described in 
                        section 403(b), or
                            ``(iv) an eligible deferred compensation 
                        plan described in section 457(b) and maintained 
                        by an employer described in section 
                        457(e)(1)(A),
                if the taxpayer or any individual described in 
                subparagraph (A) or (B) with respect to the taxpayer 
                has the right to make any decision with respect to the 
                investment of any amount in such account, or
                    ``(G) files a consolidated return (within the 
                meaning of section 1501) with the taxpayer for any 
                taxable year which includes a portion of such period.
            ``(2) Determination of marital status.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), marital status shall be determined 
                under section 7703.
                    ``(B) Special rule for married individuals filing 
                separately and living apart.--A husband and wife who--
                            ``(i) file separate returns for any taxable 
                        year, and
                            ``(ii) live apart at all times during such 
                        taxable year,
                shall not be treated as married individuals.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
or other guidance as may be appropriate to carry out this section, 
including regulations or guidance which require in appropriate cases a 
taxpayer to bifurcate derivatives described in subsection (d)(4) for 
purposes of applying this part or which may be necessary to prevent the 
avoidance of the purposes of subsection (f) (including treating persons 
as related parties if such persons are formed or availed of to avoid 
the purposes of such subsection).

``SEC. 493. DERIVATIVE DEFINED.

    ``(a) In General.--For purposes of this part, except as otherwise 
provided in this section, the term `derivative' means any contract 
(including any option, forward contract, futures contract, short 
position, swap, or similar contract) the value of which, or any payment 
or other transfer with respect to which, is (directly or indirectly) 
determined by reference to one or more of the following:
            ``(1) Any share of stock in a corporation.
            ``(2) Any partnership or beneficial ownership interest in a 
        partnership or trust.
            ``(3) Any evidence of indebtedness.
            ``(4) Except as provided in subsection (b)(1), any real 
        property.
            ``(5) Any commodity which is actively traded (within the 
        meaning of section 1092(c)(4)).
            ``(6) Any currency.
            ``(7) Any rate, price, amount, index, formula, or 
        algorithm.
            ``(8) Any other item which the Secretary may prescribe.
Except as provided by the Secretary to prevent the avoidance of the 
purposes of this part, such term shall not include any item described 
in paragraphs (1) through (8). For purposes of this subsection, the 
value of, or any payment or other transfer with respect to, a contract 
shall not be treated as indirectly determined by reference to one or 
more of the items described in paragraphs (1) through (8) solely 
because the change in a variable affecting such value, payment, or 
other transfer also affects the value, level, amount, or calculation of 
such item or items.
    ``(b) Exceptions.--
            ``(1) Certain real property.--
                    ``(A) In general.--For purposes of this part, the 
                term `derivative' shall not include any contract with 
                respect to interests in real property (as defined in 
                section 856(c)(5)(C)) if such contract requires 
                physical delivery of such real property.
                    ``(B) Options to settle in cash.--
                            ``(i) In general.--For purposes of 
                        subparagraph (A), a contract which provides for 
                        an option of cash settlement shall not be 
                        treated as requiring physical delivery of real 
                        property unless the option is exercisable only 
                        in unusual and exceptional circumstances.
                            ``(ii) Option of cash settlement.--For 
                        purposes of clause (i), a contract provides an 
                        option of cash settlement if the contract 
                        settles in (or could be settled in) cash or 
                        property other than the underlying real 
                        property.
            ``(2) Hedging transactions.--
                    ``(A) In general.--For purposes of this part, the 
                term `derivative' shall not include any contract which 
                is part of a hedging transaction (as defined in section 
                1221(b)).
                    ``(B) Section 988 hedging transactions.--For 
                exception for section 988 hedging transactions, see 
                section 988(d)(1).
            ``(3) Securities lending, sale-repurchase, and similar 
        financing transactions.--To the extent provided by the 
        Secretary, for purposes of this part, the term `derivative' 
        shall not include the right to the return of the same or 
        substantially identical securities transferred in a securities 
        lending transaction, sale-repurchase transaction, or similar 
        financing transaction.
            ``(4) Options received in connection with the performance 
        of services.--For purposes of this part, the term `derivative' 
        shall not include any option described in section 83(e)(3) 
        received in connection with the performance of services.
            ``(5) Insurance, annuity, and endowment contracts.--For 
        purposes of this part, the term `derivative' shall not include 
        any insurance, annuity, or endowment contract issued by an 
        insurance company to which subchapter L applies (or issued by 
        any foreign corporation to which such subchapter would apply if 
        such foreign corporation were a domestic corporation).
            ``(6) Derivatives with respect to stock of members of same 
        worldwide affiliated group.--
                    ``(A) In general.--For purposes of this part, the 
                term `derivative' shall not include any derivative 
                (determined without regard to this paragraph) with 
                respect to stock issued by any member of the same 
                worldwide affiliated group in which the taxpayer is a 
                member.
                    ``(B) Worldwide affiliated group.-- For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means a group consisting of--
                            ``(i) the includible members of an 
                        affiliated group (as defined in section 
                        1504(a), determined without regard to paragraph 
                        (2) of section 1504(b)), and
                            ``(ii) all controlled foreign corporations 
                        in which such members in the aggregate meet the 
                        ownership requirements of section 1504(a)(2) 
                        either directly or indirectly through applying 
                        paragraph (2) of section 958(a) or through 
                        applying rules similar to the rules of such 
                        paragraph to stock owned directly or indirectly 
                        by domestic partnerships, trusts, or estates.
            ``(7) Commodities used in normal course of trade or 
        business.--For purposes of this part, the term `derivative' 
        shall not include any contract with respect to any commodity 
        if--
                    ``(A) such contract requires physical delivery with 
                the option of cash settlement only in unusual and 
                exceptional circumstances, and
                    ``(B) such commodity is used (and is used in 
                quantities with respect to which such derivative 
                relates) in the normal course of the taxpayer's trade 
                or business (or, in the case of an individual, for 
                personal consumption).
    ``(c) Contracts With Embedded Derivative Components.--
            ``(1) In general.--If a contract has derivative and 
        nonderivative components, then each derivative component shall 
        be treated as a derivative for purposes of this part. If the 
        derivative component cannot be separately valued, then the 
        entire contract shall be treated as a derivative for purposes 
        of this part.
            ``(2) Exception for certain embedded derivative components 
        of debt instruments.--A debt instrument shall not be treated as 
        having a derivative component merely because--
                    ``(A) such debt instrument is denominated in a 
                nonfunctional currency (as defined in section 
                988(c)(1)(C)(ii)), or
                    ``(B) payments with respect to such debt instrument 
                are determined by reference to the value of a 
                nonfunctional currency (as so defined).
    ``(d) Treatment of American Depository Receipts and Similar 
Instruments.--Except as otherwise provided by the Secretary, for 
purposes of this part, American depository receipts (and similar 
instruments) with respect to shares of stock in foreign corporations 
shall be treated as shares of stock in such foreign corporations.

                     ``Subpart B--Similar Contracts

``Sec. 494. Tax treatment of contracts similar to derivatives.

``SEC. 494. TAX TREATMENT OF CONTRACTS SIMILAR TO DERIVATIVES.

    ``(a) In General.--For purposes of this title, if there is a 
taxable transaction with respect to any applicable property interest, 
then, notwithstanding any other provision of this title other than 
section 1032, gain or loss attributable to the taxable transaction 
shall be considered gain or loss from the sale or exchange of property 
which has the same character as the property to which the applicable 
property interest relates has (or would have) in the hands of the 
taxpayer.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Applicable property interest.--The term `applicable 
        property interest' means any right or obligation with respect 
        to property other than--
                    ``(A) a derivative (as defined in section 493), or
                    ``(B) any position in applicable property to which 
                section 1092 applies.
            ``(2) Taxable transaction.--The term `taxable transaction' 
        means, with respect to any applicable property interest--
                    ``(A) any termination or transfer (as defined in 
                section 491(c)(3)) of such interest, or
                    ``(B) any payment in fulfillment or partial 
                fulfillment of such interest.''.

SEC. 3. COORDINATION OF NEW RULES WITH EXISTING RULES.

    (a) Coordination With Rules for Dealers and Traders.--
            (1) Derivatives not treated as securities.--Section 
        475(c)(2) is amended--
                    (A) by adding ``and'' at the end of subparagraph 
                (C),
                    (B) by striking subparagraphs (D) and (E) and by 
                redesignating subparagraph (F) as subparagraph (D),
                    (C) by striking ``subparagraph (A), (B), (C), (D), 
                or (E)'' in subparagraph (D)(i), as so redesignated, 
                and inserting ``subparagraph (A), (B), or (C)'', and
                    (D) by amending the last sentence to read as 
                follows: ``Such term shall not include any derivative 
                to which section 491(a) applies.''.
            (2) Derivatives not treated as commodities.--Section 
        475(e)(2) is amended--
                    (A) by adding ``and'' at the end of subparagraph 
                (A),
                    (B) by striking subparagraphs (B) and (C) and by 
                redesignating subparagraph (D) as subparagraph (B), and
                    (C) by striking ``subparagraph (A), (B) or (C)'' in 
                subparagraph (B)(i), as so redesignated, and inserting 
                ``subparagraph (A)''.
            (3) Conforming amendments.--
                    (A) Section 475(b) is amended by striking paragraph 
                (4).
                    (B) Section 475(d)(2)(B) is amended--
                            (i) by striking ``subsection 
                        (c)(2)(F)(iii)'' and inserting ``subsection 
                        (c)(2)(D)(iii)'', and
                            (ii) by striking ``subsection (c)(2)(F)'' 
                        and inserting ``subsection (c)(2)(D)''.
                    (C) Section 475(f)(1)(D) is amended by striking 
                ``subsections (b)(4) and (d)'' and inserting 
                ``subsection (d)''.
    (b) Coordination With Straddle Rules.--
            (1) In general.--Section 1092 is amended to read as 
        follows:

``SEC. 1092. STRADDLES.

    ``(a) Recognition of Loss in Case of Straddles, etc.--
            ``(1) Limitation on recognition of loss.--
                    ``(A) In general.--Any loss with respect to 1 or 
                more positions shall be taken into account for any 
                taxable year only to the extent that the amount of such 
                loss exceeds the unrecognized gain (if any) with 
                respect to 1 or more positions which were offsetting 
                positions with respect to 1 or more positions from 
                which the loss arose.
                    ``(B) Carryover of loss.--Any loss which may not be 
                taken into account under subparagraph (A) for any 
                taxable year shall, subject to the limitations under 
                subparagraph (A), be treated as sustained in the 
                succeeding taxable year.
            ``(2) Unrecognized gain.--For purposes of this subsection--
                    ``(A) In general.--The term `unrecognized gain' 
                means--
                            ``(i) in the case of any position held by 
                        the taxpayer as of the close of the taxable 
                        year, the amount of gain which would be taken 
                        into account with respect to such position if 
                        such position were sold on the last business 
                        day of such taxable year at its fair market 
                        value, and
                            ``(ii) in the case of any position with 
                        respect to which, as of the close of the 
                        taxable year, gain has been realized but not 
                        recognized, the amount of gain so realized.
                    ``(B) Reporting of gain.--Each taxpayer shall 
                disclose to the Secretary, at such time and in such 
                manner and form as the Secretary may prescribe--
                            ``(i) each position (whether or not part of 
                        a straddle) with respect to which, as of the 
                        close of the taxable year, there is 
                        unrecognized gain, and
                            ``(ii) the amount of such unrecognized 
                        gain.
                The Secretary may waive the requirement to report under 
                this subparagraph with respect to any position if such 
                reporting is not required to carry out the purposes of 
                this section.
            ``(3) Special rules for physically settled positions.--For 
        purposes of this subsection, if a taxpayer settles a position 
        which is part of a straddle by delivering property to which the 
        position relates (and such position, if terminated, would 
        result in a realization of a loss), then such taxpayer shall be 
        treated as if such taxpayer--
                    ``(A) terminated the position for its fair market 
                value immediately before the settlement, and
                    ``(B) sold the property so delivered by the 
                taxpayer at its fair market value.
    ``(b) Regulations.--The Secretary shall prescribe such regulations 
with respect to gain or loss on positions which are a part of a 
straddle as may be appropriate to carry out the purposes of this 
section and section 263(g). To the extent consistent with such 
purposes, such regulations shall include rules applying the principles 
of subsections (a) and (d) of section 1091 and of subsections (b) and 
(d) of section 1233 (as in effect before their repeal).
    ``(c) Definitions and Rules Relating to Straddles.--For purposes of 
this section--
            ``(1) Straddle defined.--The term `straddle' means 
        offsetting positions with respect to applicable property.
            ``(2) Offsetting positions.--A taxpayer holds offsetting 
        positions with respect to applicable property if the taxpayer 
        holds any position which by itself, or in combination with 1 or 
        more other positions held by the taxpayer, has a delta (within 
        the meaning of section 492(d)(1)) with respect to any other 
        position held by the taxpayer which is within the range 
        beginning with minus 0.7 and ending with minus 1.0. For 
        purposes of this paragraph, positions shall be taken into 
        account whether or not they are in the same applicable 
        property.
            ``(3) Determination of delta.--For purposes of this 
        section--
                    ``(A) Method of determination.--The delta with 
                respect to any position in applicable property with 
                respect to another position in applicable property (or 
                any combination of such positions) shall be determined 
                in the same manner as under section 492(d)(2).
                    ``(B) Timing of delta determination and other 
                special rules.--Rules similar to the rules of 
                paragraphs (3) and (4) of section 492(d) shall apply 
                for purposes of this paragraph.
            ``(4) Applicable property and position defined.--
                    ``(A) Applicable property.--The term `applicable 
                property' means any item which is--
                            ``(i) described in paragraph (1), (2), (3), 
                        (5), (6), (7), or (8) of section 493(a) (or any 
                        item substantially the same as any such item), 
                        and
                            ``(ii) of a type which is actively traded.
                    ``(B) Position.--
                            ``(i) In general.--The term `position' 
                        means an interest in applicable property.
                            ``(ii) Derivatives excluded.--Such term 
                        shall not include a derivative (as defined in 
                        section 493).
                    ``(C) Stock and debt whose value primarily 
                determined by reference to other items.--Except as 
                provided in regulations, if the taxpayer holds an item 
                described in paragraph (1) or (3) of section 493(a) the 
                value of which, or with respect to which any payment or 
                other transfer, is primarily determined by reference to 
                one or more other items described in paragraphs (1) 
                through (8) of section 493(a), then, solely for 
                purposes of this section, such item described in 
                paragraph (1) or (3) of section 493(a) shall also be 
                treated as if it were such other item.
            ``(5) Positions held by related persons, etc.--
                    ``(A) In general.--In determining whether 2 or more 
                positions are offsetting, the taxpayer shall be treated 
                as holding any position held by a related party (within 
                the meaning of section 492(f)).
                    ``(B) Certain pass-through entities.--If part or 
                all of the gain or loss with respect to a position held 
                by a partnership, trust, or other entity would properly 
                be taken into account for purposes of this chapter by a 
                taxpayer, then, except to the extent otherwise provided 
                by the Secretary, such position shall be treated as 
                held by the taxpayer.
            ``(6) Special rules for foreign currency.--
                    ``(A) Position to include interest in certain 
                debt.--For purposes of paragraph (4)(B)(i), an 
                obligor's interest in a nonfunctional currency 
                denominated debt obligation is treated as a position in 
                the nonfunctional currency.
                    ``(B) Actively traded requirement.--For purposes of 
                paragraph (4)(A)(ii), foreign currency for which there 
                is an active interbank market is presumed to be 
                actively traded.
    ``(d) Exception for Hedging Transactions and Investment Hedging 
Units.--This section shall not apply in the case of--
            ``(1) any hedging transaction (as defined in section 
        1221(b)), and
            ``(2) any investment hedging unit (as defined in section 
        492).
    ``(e) Cross Reference.--For provisions requiring capitalization of 
certain interest and carrying charges where there is a straddle, see 
section 263(g).''.
            (2) Conforming amendments.--The last sentence of section 
        246(c)(4) is amended--
                    (A) by inserting ``(as in effect before its 
                repeal)'' after ``section 1092(c)(4)'', and
                    (B) by inserting ``(as so in effect)'' after 
                ``section 1092(f)''.
    (c) Debt Instruments Held by Insurance Companies.--
            (1) In general.--Subsection (a) of section 1221 is amended 
        by striking ``or'' at the end of paragraph (7), by striking the 
        period at the end of paragraph (8) and inserting ``; or'', and 
        by adding at the end the following:
            ``(9) any bond, debenture, note, or certificate or other 
        evidence of indebtedness held by an applicable insurance 
        company (as defined in subsection (b)(5)).''.
            (2) Applicable insurance company.--Section 1221(b), as 
        amended by this Act, is amended by adding at the end the 
        following:
            ``(5) Applicable insurance company.--For purposes of 
        subsection (a)(9)--
                    ``(A) In general.--The term `applicable insurance 
                company' means, with respect to any taxable year, an 
                insurance company (as defined in the last sentence of 
                section 816(a))--
                            ``(i) which is subject to tax under section 
                        801(a) or section 831(a),
                            ``(ii) with respect to which sections 
                        831(b), 835, and 842 do not apply, and
                            ``(iii) which is not treated as a stock 
                        insurance company solely by reason of section 
                        833(a)(1).
                    ``(B) Permanent treatment by company as ordinary 
                asset.--If an asset is treated as an asset described in 
                subsection (a)(9) with respect to any applicable 
                insurance company for any taxable year, such asset 
                shall be treated as so described during any subsequent 
                taxable year such asset is held by such company.''.
            (3) Regulations.--Paragraph (4) of section 1221(b) is 
        amended--
                    (A) by striking ``The Secretary'' and inserting:
                    ``(A) Related parties.--The Secretary'', and
                    (B) by adding at the end the following:
                    ``(B) Assets of insurance companies.--The Secretary 
                shall prescribe such regulations as may be necessary or 
                appropriate to carry out the purposes of subsection 
                (a)(9), including such regulations as may be necessary 
                to prevent the avoidance of Federal income tax through 
                the sale or exchange of assets described in such 
                subsection.''.
            (4) Effective date.--
                    (A) In general.--The amendments made by this 
                subsection shall apply to any bond, debenture, note, or 
                certificate or other evidence of indebtedness held or 
                acquired after the 90-day period beginning with the 
                date of the enactment of this Act.
                    (B) Transition rule.--If a taxpayer has a capital 
                loss carryover to any taxable year of the taxpayer 
                beginning after the close of the 90-day period 
                described in subparagraph (A), the taxpayer shall, in 
                addition to other short-term capital gain of the 
                taxpayer (if any), treat as short-term capital gain 
                (rather than as ordinary income) an amount equal to the 
                lesser of--
                            (i) the net gain (if any) from sales or 
                        exchanges during such taxable year of assets to 
                        which section 1221(a)(9) of such Code (as added 
                        by paragraph (1)) applies, or
                            (ii) the capital loss carryovers to such 
                        taxable year from taxable years beginning 
                        before the close of such period.
    (d) RICs Allowed Net Operating Loss Deduction.--
            (1) In general.--Paragraph (2) of section 852(b) is amended 
        by striking subparagraph (B) and by redesignating subparagraphs 
        (C) through (G) as subparagraphs (B) through (F), respectively.
            (2) Other modifications.--Paragraph (6) of section 172(d) 
        is amended to read follows:
            ``(6) Modifications related to rics and reits.--In the case 
        of any taxable year for which part I or II of subchapter M 
        applies to the taxpayer--
                    ``(A) the net operating loss for such taxable year 
                shall be computed by taking into account--
                            ``(i) in the case of a regulated investment 
                        company, the adjustments described in section 
                        852(b)(2) (other than the deduction for 
                        dividends paid described in subparagraph (C) 
                        thereof)), and
                            ``(ii) in the case of a real estate 
                        investment trust, the adjustments described in 
                        section 857(b)(2) (other than the deduction for 
                        dividends paid described in subparagraph (B) 
                        thereof),
                    ``(B) where such taxable year is a `prior taxable 
                year' referred to in paragraph (2) of subsection (b), 
                references in such paragraph to `taxable income' shall 
                be treated as references to--
                            ``(i) in the case of a regulated investment 
                        company, regulated investment company taxable 
                        income (as defined in section 852(b)(2)), and
                            ``(ii) in the case of a real estate 
                        investment trust, real estate investment 
                        taxable income (as defined in section 
                        857(b)(2)), and
                    ``(C) subsection (a)(2) shall be applied by 
                treating references to taxable income as references 
                to--
                            ``(i) in the case of a regulated investment 
                        company, regulated investment company taxable 
                        income (as defined in section 852(b)(2)) but 
                        without regard to the deduction for dividends 
                        paid (as defined in section 561), and
                            ``(ii) in the case of a real estate 
                        investment trust, real estate investment 
                        taxable income (as defined in section 
                        857(b)(2)) but without regard to the deduction 
                        for dividends paid (as defined in section 
                        561).''.
            (3) Conforming amendments.--
                    (A) Section 443(e)(3) is amended by striking 
                ``section 852(b)(2)(D)'' and inserting ``section 
                852(b)(2)(C)''.
                    (B) Section 852(a)(1)(A) is amended by striking 
                ``subsection (b)(2)(D)'' and inserting ``subsection 
                (b)(2)(C)''.
                    (C) Section 4982(e)(1)(A) is amended by striking 
                ``and (D)'' and inserting ``and (C)''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to net operating losses for taxable years ending 
        after the 90th day after the date of the enactment of this Act.
    (e) Nonrecognition of Gain or Loss From Transactions by a 
Corporation With Respect to Its Stock.--
            (1) In general.--Section 1032 is amended to read as 
        follows:

``SEC. 1032. TRANSACTIONS BY A CORPORATION WITH RESPECT TO ITS STOCK.

    ``(a) Nonrecognition on Exchange of Stock for Property.--No gain or 
loss shall be recognized to a corporation on the receipt of money or 
other property in exchange for stock of such corporation.
    ``(b) Derivative Transactions by a Corporation With Respect to Its 
Stock.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, section 1032 derivative items of a corporation 
        shall not be taken into account in determining such 
        corporation's liability for tax under this subtitle.
            ``(2) Income recognition on certain forward contracts.--
                    ``(A) In general.--If--
                            ``(i) a corporation acquires its stock, and
                            ``(ii) such acquisition is part of a plan 
                        (or series of related transactions) pursuant to 
                        which the corporation enters into a forward 
                        contract with respect to its stock,
                such corporation shall include amounts in income as if 
                the excess of the amount to be received under the 
                forward contract over the fair market value of the 
                stock as of the date the corporation entered into the 
                forward contract were original issue discount on a debt 
                instrument acquired on such date. The preceding 
                sentence shall apply only to the extent that the amount 
                of stock involved in the forward contract does not 
                exceed the amount acquired as described in clause (i).
                    ``(B) Plan presumed to exist.--If a corporation 
                enters into a forward contract with respect to its 
                stock within the 60-day period beginning on the date 
                which is 30 days before the date that the corporation 
                acquires its stock, such acquisition shall be treated 
                as pursuant to a plan described in subparagraph (A)(ii) 
                unless it is established that entering into such 
                contract and such acquisition are not pursuant to a 
                plan or series of related transactions.
    ``(c) Section 1032 Derivative Items.--For purposes of this section, 
the term `section 1032 derivative item' means, with respect to any 
corporation, any item of income, gain, loss, or deduction if--
            ``(1) such item arises out of the rights or obligations 
        under any derivative (as defined in section 493) to the extent 
        such derivative relates to the corporation's stock (or is 
        attributable to any transfer or extinguishment of any such 
        right or obligation), or
            ``(2) such item arises under any other contract or position 
        but only to the extent that such item reflects (or is 
        determined by reference to) changes in the value of such stock 
        or distributions thereon.
Such term shall not include any deduction with respect to which section 
83(h) applies and shall not include any deduction for any item which is 
in the nature of compensation for services rendered. For purposes of 
this subparagraph, de minimis relationships, as determined by the 
Secretary, shall be disregarded.
    ``(d) Coordination With Derivative and Straddle Rules.--In the case 
of a derivative or other contract or position described in subsection 
(c) which is held by a corporation with respect to its stock--
            ``(1) this section (rather than part IV of subchapter E or 
        section 1092) shall apply in determining the treatment of 
        section 1032 derivative items under this subtitle, and
            ``(2) such derivative or other contract or position shall 
        not be taken into account in determining whether the 
        corporation has an investment hedging unit, applicable property 
        interest, or straddle with respect to its stock for purposes of 
        such part or section.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
or other guidance as may be appropriate to carry out the purposes of 
this section, including regulations or other guidance which treat the 
portion of an instrument which is described in subsection (c)(1) 
separately from the portion of such instrument which is not so 
described.
    ``(f) Basis.--For basis of property acquired by a corporation in 
certain exchanges for its stock, see section 362.''.
            (2) Clerical amendment.--The item relating to section 1032 
        in the table of sections for part III of subchapter O of 
        chapter 1 is amended to read as follows:

``Sec. 1032. Transactions by a corporation with respect to its 
                            stock.''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to transactions entered into after the date of the 
        enactment of this Act.

SEC. 4. TECHNICAL AND CONFORMING AMENDMENTS.

    (a) Repeal of Certain Other Superceded Rules for Determining 
Capital Gains and Losses.--
            (1) In general.--Part IV of subchapter P of chapter 1 is 
        amended by striking sections 1233, 1234, 1234A, 1234B, 1236, 
        1256, 1258, 1259, and 1260 (and by striking the items relating 
        to such sections in the table of sections for such part).
            (2) Conforming amendments related to repeal of section 
        1234.--Section 6045(h)(2) is amended--
                    (A) by striking ``(as defined in section 
                1234(b)(2)(A))'', and
                    (B) by adding at the end the following: ``For 
                purposes of the preceding sentence, 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.''.
            (3) Conforming amendments related to repeal of section 
        1236.--
                    (A) Section 475(d)(3)(A) is amended by striking 
                ``or section 1236(b)''.
                    (B) Section 512(b)(5) is amended by striking 
                ``section 1236(c)'' and inserting ``section 1058(c)''.
                    (C) Section 1058 is amended--
                            (i) by striking ``(as defined in section 
                        1236(c))'' in subsection (a), and
                            (ii) by redesignating subsection (c) as 
                        subsection (d) and by inserting after 
                        subsection (b) the following new subsection:
    ``(c) Securities.--For purposes of this section, the term 
`security' means any share of stock in any corporation, certificate of 
stock or interest in any corporation, note, bond, debenture, or 
evidence of indebtedness, or any evidence of an interest in or right to 
subscribe to or purchase any of the foregoing.''.
            (4) Conforming amendments related to repeal of section 
        1256.--
                    (A) Section 461(i)(3)(B) is amended to read as 
                follows:
                    ``(B) any partnership or other entity (other than a 
                corporation which is not an S corporation) if more than 
                35 percent of the losses of such entity during the 
                taxable year are allocable to limited partners or 
                limited entrepreneurs (within the meaning of subsection 
                (k)(4)), and''.
                    (B) Section 475(d)(1) is amended by striking 
                ``sections 263(g), 263A, and 1256(a)'' and inserting 
                ``sections 263(g) and 263A''.
                    (C) Section 988(c)(1) is amended by striking 
                subparagraphs (D) and (E).
                    (D) Section 1212 is amended by striking subsection 
                (c).
                    (E) Section 1223 is amended by striking paragraphs 
                (7) and (14).
                    (F) Section 1281(b)(1)(E) is amended to read as 
                follows:
                    ``(E) is part of a hedging transaction (as defined 
                in section 1221(b)) or an investment hedging unit (as 
                defined in section 492), or''.
                    (G) Section 1402 is amended by striking subsection 
                (i).
                    (H) Section 4982(e)(6)(B) is amended by striking 
                ``sections 1256 and 1296'' and inserting ``sections 491 
                and 1296''.
            (5) Conforming amendments related to repeal of section 
        1259.--Section 475(f)(1) is amended by striking subparagraph 
        (C) and by redesignating subparagraph (D) as subparagraph (C).
    (b) Other Conforming Amendments.--
            (1) Section 355(g)(2)(B)(i)(V) is amended to read as 
        follows:
                                    ``(V) any derivative (as defined in 
                                section 493),''.
            (2) Section 856(n)(4) is amended by inserting ``or 
        derivatives (as defined in section 493)'' after ``securities 
        (as defined in section 475(c)(2))''.
            (3) Section 857(e)(2)(C)(i) is amended by striking 
        ``section 860E or 1272'' and inserting ``section 491, 860E, or 
        1272''.
            (4) Section 988(d)(1) is amended--
                    (A) by striking ``or 1256'' and inserting ``or 
                491'', and
                    (B) by striking ``1092, and 1256'' and inserting 
                ``491, and 1092''.
            (5) Section 1091(e) is amended to read as follows:
    ``(e) Coordination With Mark to Market of Derivatives and 
Underlying Investments.--For purposes of this section, the term `stock 
or securities' shall not include--
            ``(1) any derivative (as defined in section 493), or
            ``(2) any underlying investment (as defined in section 
        492(e)(1)) which, at the time of the sale or other disposition, 
        is part of an investment hedging unit (as defined in section 
        492).''.
            (6)(A) Section 1221(a)(6) is amended to read as follows:
            ``(6) any--
                    ``(A) derivative (as defined in section 493), or
                    ``(B) any underlying investment (as defined in 
                section 492(e)(1)) which is part of an investment 
                hedging unit (as defined in section 492),''.
            (B) Section 1221(b) is amended by striking paragraph (1).
            (7) Section 4975(f)(11)(D) is amended by striking clauses 
        (i) and (ii) and inserting the following:
                            ``(i) Security.--The term `security' means 
                        any security described in section 475(c)(2) 
                        (without regard to subparagraph (D)(iii) 
                        thereof) and any derivative with respect to 
                        such a security (within the meaning of section 
                        493).
                            ``(ii) Commodity.--The term `commodity' 
                        means any commodity described in section 
                        475(e)(2) (without regard to subparagraph 
                        (B)(iii) thereof) and any derivative with 
                        respect to such a commodity (within the meaning 
                        of section 493).''.
            (8) The table of parts for subchapter E of chapter 1 is 
        amended by adding at the end the following new item:

    ``Part IV. Tax Treatment of Derivatives and Similar Contracts''.

SEC. 5. EFFECTIVE DATES.

    (a) In General.--Except as provided in this Act--
            (1) the amendments made by section 2 shall apply to taxable 
        events occurring after the 90-day period beginning with the 
        date of the enactment of this Act, in taxable years ending 
        after the last day of such period, and
            (2) the amendments made by sections 3 and 4 shall apply to 
        derivatives and underlying investments held after the last day 
        of such period.
    (b) Identification Requirements.--If, as of the close of the 90-day 
period described in subsection (a)(1), a taxpayer simultaneously holds 
1 or more derivatives with respect to an underlying investment and the 
underlying investment--
            (1) the taxpayer shall make the identifications required 
        under section 492(c)(2) of Internal Revenue Code of 1986 (as 
        added by section 2 of this Act) before the close of such 
        period, and
            (2) if such identifications result in an investment hedging 
        unit, the first applicable hedging period with respect to such 
        unit shall begin on the day after the close of such period.
    (c) Definitions.--For purposes of this section, any term used in 
this section which is also used in part IV of subchapter E of chapter 1 
of such Code (as so added) shall have the same meaning as when used in 
such part.
                                 <all>
Modernization of Derivatives Tax Act of 2021
A bill to amend the Internal Revenue Code of 1986 to modernize the tax treatment of derivatives and their underlying investments, and for other purposes.
Modernization of Derivatives Tax Act of 2021
Sen. Wyden, Ron