Constructive sale

Also called: IRC §1259 constructive sale

IRC §1259 says that if you eliminate substantially all of the risk and reward of an appreciated position, the tax code treats it as if you sold it, even though you still hold the shares. The deemed sale triggers the capital gain immediately.

What triggers a constructive sale?

Classic triggers include a short sale against the box, entering a total-return swap on the same property, or a futures or forward contract to deliver the appreciated position. The common thread is fully offsetting the economic exposure.

How do collars avoid it?

A collar leaves a band of risk and reward between the put floor and the call ceiling. As long as that band is wide enough — strikes spaced sufficiently apart — the position retains meaningful exposure and is not a constructive sale. Spacing the strikes is precisely what keeps a protective collar on the right side of §1259.

This definition is for educational and informational purposes only and is not investment, tax, or legal advice. Option strategies involve risk and are not suitable for all investors. Tax treatment of options is complex and depends on individual circumstances, holding periods, and applicable law. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser.