Cases: United States v. Catto, 384 U.S. 102 (1966); Sirbo Holdings, Inc. v. Commissioner, 476 F.2d 981 (2d Cir. 1973)
(a) General rule
Amended 1958, 1969, 1976, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 1001(b)(15), (e), substituted “6 months” for “1 year” wherever appearing, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 711(c)(2)(A)(iii), amended subsec. (a) generally, substituting pars. (1) to (4), for “If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 1 year into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 1 year. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For purposes of this subsection—
“(1) in determining under this subsection whether gains exceed losses, the gains described therein shall be included only if and to the extent taken into account in computing gross income and the losses described therein shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply; and
“(2) losses (including losses not compensated for by insurance or otherwise) upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of (A) property used in the trade or business or (B) capital assets held for more than 1 year shall be considered losses from a compulsory or involuntary conversion.
In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any property used in the trade or business or of any capital asset held for more than 1 year, this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.”
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year” wherever appearing.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(1)(R), provided that in subsecs. (a), first and last sentences, (a)(2), and (b)(1), (4), “6 months” would be changed to “9 months” for taxable years beginning in 1977.
- 1969 Pub. L. 91-172 Pub. L. 91–172, § 516(b), provided that casualty (or theft) losses with respect to depreciable property and real estate used in trade or business and capital assets held for the production of income as well as personal assets are to be consolidated with casualty (or theft) gains with respect to this type of property and if the casualty losses exceed the casualty gains, the net loss is treated as an ordinary loss without regard to whether there may be noncasualty gains under this section, but, if the casualty gains exceed the casualty losses, the net gain is treated as a gain under this section and must be consolidated with other gains and losses under this section.
- 1958 Pub. L. 85-866 Pub. L. 85–866 inserted provision respecting casualty losses sustained upon certain uninsured property.
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(1) Gains exceed losses If—
(A) the section 1231 gains for any taxable year, exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be.
(2) Gains do not exceed losses If—
(A) the section 1231 gains for any taxable year, do not exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets.
(3) Section 1231 gains and losses For purposes of this subsection—
(A) Section 1231 gain The term “section 1231 gain” means—
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(i) any recognized gain on the sale or exchange of property used in the trade or business, and
(ii) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of—
(II) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit.
(B) Section 1231 loss The term “section 1231 loss” means any recognized loss from a sale or exchange or conversion described in subparagraph (A).
(4) Special rules For purposes of this subsection—
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(A) In determining under this subsection whether gains exceed losses—
(i) the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and
(ii) the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply.
(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of—
(ii) capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit,
shall be treated as losses from a compulsory or involuntary conversion.
(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any—
(ii) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit,
this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.
(b) Definition of property used in the trade or business For purposes of this section—
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(1) General rule The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not—
(A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,
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(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
(C) 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 described in paragraph (3) of section 1221(a), or
Amended 1969, 1999, 2017
- 2017 Pub. L. 115-97 Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright”.
- 1999 Pub. L. 106-170 Pub. L. 106–170 substituted “section 1221(a)” for “section 1221”.
- 1969 Pub. L. 91-172 Pub. L. 91–172, § 514(b)(2), inserted reference to a letter or memorandum.
(D) 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 described in paragraph (5) of section 1221(a).
Amended 1978, 1981, 1999
- 1999 Pub. L. 106-170 Pub. L. 106–170 substituted “section 1221(a)” for “section 1221”.
- 1981 Pub. L. 97-34 Pub. L. 97–34 substituted “paragraph (5)” for “paragraph (6)”.
- 1978 Pub. L. 95-600 Pub. L. 95–600 added subpar. (D).
Amended 1976, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 1001(b)(15), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year” wherever appearing.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(1)(R), provided that in subsecs. (a), first and last sentences, (a)(2), and (b)(1), (4), “6 months” would be changed to “9 months” for taxable years beginning in 1977.
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(2) Timber, coal, or domestic iron ore Such term includes timber, coal, and iron ore with respect to which section 631 applies.
Amended 1964
- 1964 Pub. L. 88-272 Pub. L. 88–272 inserted reference to iron ore in text, and to domestic iron ore in heading.
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(3) Livestock Such term includes—
Amended 1969
- 1969 Pub. L. 91-172 Pub. L. 91–172, § 212(b)(1), redesignated existing provisions as subpar. (B) and added subpar. (A).
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(A) cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and
(B) other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition.
Such term does not include poultry.
(4) Unharvested crop In the case of an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as “property used in the trade or business.”
Amended 1976, 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 1001(b)(15), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year” wherever appearing.
- 1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(1)(R), provided that in subsecs. (a), first and last sentences, (a)(2), and (b)(1), (4), “6 months” would be changed to “9 months” for taxable years beginning in 1977.
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(c) Recapture of net ordinary losses
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 176(a), added subsec. (c).
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(1) In general The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses.
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(2) Non-recaptured net section 1231 losses For purposes of this subsection, the term “non-recaptured net section 1231 losses” means the excess of—
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(A) the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over
Amended 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295 struck out “beginning after December 31, 1981” after “years”.
(B) the portion of such losses taken into account under paragraph (1) for such preceding taxable years.
(3) Net section 1231 gain For purposes of this subsection, the term “net section 1231 gain” means the excess of—
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(A) the section 1231 gains, over
(B) the section 1231 losses.
(4) Net section 1231 loss For purposes of this subsection, the term “net section 1231 loss” means the excess of—
(A) the section 1231 losses, over
(B) the section 1231 gains.
(5) Special rules For purposes of determining the amount of the net section 1231 gain or loss for any taxable year, the rules of paragraph (4) of subsection (a) shall apply.