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TITLE 26-INTERNAL REVENUE CODE except as otherwise provided in this subsec- tion-- (1) subsection (b)(2) shall apply first to sub- stantially identical assets acquired for arbi- trage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of busi- ness on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected; (2) in the event that assets acquired for ar- bitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to consti- tute a short sale made on that day; (3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and (4) for the purpose of this subsection arbi- trage operations are transactions involving the purchase and sale of assets for the pur- pose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the tax- payer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbi- trage operations will include stocks and secu- rities and the right to acquire stocks and se- curities. (g) Hedging transactions This section shall not apply in the case of a hedging transaction in commodity futures. (Aug. 16, 1954, ch. 736, 68A Stat. 327; Aug. 12, 1955, ch. 871, § 1, 69 Stat. 717; Sept. 2, 1958, Pub. L. 85-866, title I, § 52(a), (b), 72 Stat. 1643, 1644; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(T), title XIX, § 1901(a)(137), 90 Stat. 1732, 1787.) TAXABLE YEARS AFTER 1977 Subsecs. (b), (d) and (e) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct 4, 1976, 90 Stat. 1732, effec- tive with respect to taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 1402(b)(1)(T), provided that in introductory text and par. (1) of subsec. (b) of this section "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c). Pub. L. 94-455, § 1901(a)(137), substitut- ed "August 16, 1954" for "the date of enactment of this title". Subsecs. (d), (e). Pub. L. 94-455, § 1402(b)(1)(T), pro. vided that in subsecs. (d) and (e)(4)(A)(I) "6 months" would be changed to "9 months" for taxable years be. ginning in 1977. 1958--Subsec. (a). Pub. L. 85-866, § 52(b), deleted ", other than a hedging transaction in commodity fu- tures," following "sale of property". Subsec. (e)(4). Pub. L. 85-866, § 52(a), added subsec. (e)(4). Subsec. (g). Pub. L. 85-866, § 52(b), added subsec. (g). 1955-Subsec. (f). Act Aug. 12, 1955, added subsec. (f). EFE CTivE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution in subsecs. (b) introductory text and par. (1)(d), and (e)(4)(A)(i) of this section of "9 months" for "6 months" by section 1402(b)(1)(T) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsec. (c) by section 1901(a)(137) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFEcTivE DATE OF 1958 AMENDMENT Amendment of subsec. (a) and enactment of subsec. (g) by Pub. L. 85-866 applicable to taxable years begin- ning after Dec. 31, 1953. and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. Section 52(c) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [adding subsec. (e) (4) of this section] shall apply with respect to short sales made after December 31, 1957." EFFECTIVE DATE OF 1955 AMENDMENT Section 2 of act Aug. 12, 1955, provided that: "The amendment made by the first section of this Act [adding subsec. (f) of this section] shall apply only with respect to taxable years ending after the date of the enactment of this Act [Aug. 12, 1955] and only in the case of a short sale of property made by the tax- payer after such date." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1234 of this title. § 1234. Options to buy or sell (a) Treatment of gain or loss (1) General rule Gain or loss attributable to the sale or ex- change of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him). (2) Special rule for loss attributable to failure to exercise option For purposes of paragraph (1), if loss is at- tributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired. (3) Nonapplication of subsection This subsection shall not apply to- (A) an option which constitutes property described in paragraph (1) of section 1221; (B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is § 1234 Page 688