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Section 165(a) generally allows a deduction for any loss
sustained during the taxable year and not compensated for by
insurance or otherwise. Section 165(f) states that losses from
sales or exchanges of capital assets shall be allowed only to the
extent allowed in section 1211 and 1212, which set forth
limitations on capital losses. A "capital asset" is defined as
"property held by the taxpayer", but there are several exceptions
to the general rule. Sec. 1221. During the year in issue, none
of the exceptions addressed futures contracts. Sec. 1221.
(Section 1221 was amended by adding subsection 7 which excludes
clearly identified hedging transactions from the definition of
capital asset, effective for any transaction entered into on or
after December 17, 1999. Ticket to Work and Work Incentives
Improvement Act of 1999, Pub. L. 106-170, sec. 532(a)(3), 113
Stat. 1928). Because commodity futures contracts were not
specifically excluded, they generally are treated as capital
assets. See generally Arkansas Best Corp. v. Commissioner, 485
U.S. 212 (1988); Myers v. Commissioner, T.C. Memo. 1986-518.
Section 1233(a) specifically provides that gain or loss from
short sales of commodity futures shall be treated as gain or loss
from the sale of a capital asset. However, section 1233(g)
states that section 1233(a) shall not apply in the case of a
hedging transaction in commodity futures.
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Last modified: May 25, 2011