26 U.S. Code § 1221 - Capital asset defined
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(a) In general
For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;
(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);
(5) 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—
(6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—
(A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and
(7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or
(b) Definitions and special rules
(1) Commodities derivative financial instruments
For purposes of subsection (a)(6)—
(A) Commodities derivatives dealer
The term “commodities derivatives dealer” means a person which  regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.
(B) Commodities derivative financial instrument
(i) In general The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256 (b))), the value or settlement price of which is calculated by or determined by reference to a specified index.
(ii) Specified index The term “specified index” means any one or more or any combination of— which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.
(2) Hedging transaction
(A) In general
For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—
(i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,
(ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or
(B) Treatment of nonidentification or improper identification of hedging transactions
Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—
(i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or
(3) Sale or exchange of self-created musical works
At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).
 So in original. Probably should be “who”.
Source(Aug. 16, 1954, ch. 736, 68A Stat. 321; Pub. L. 91–172, title V, § 514(a),Dec. 30, 1969, 83 Stat. 643; Pub. L. 94–455, title XIX, § 1901(c)(9), title XXI, § 2132(a),Oct. 4, 1976, 90 Stat. 1803, 1925; Pub. L. 97–34, title V, § 505(a),Aug. 13, 1981, 95 Stat. 331; Pub. L. 106–170, title V, § 532(a),Dec. 17, 1999, 113 Stat. 1928; Pub. L. 107–16, title V, § 542(e)(2)(A),June 7, 2001, 115 Stat. 85; Pub. L. 107–147, title IV, § 417(20),Mar. 9, 2002, 116 Stat. 57; Pub. L. 109–222, title II, § 204(a),May 17, 2006, 120 Stat. 350; Pub. L. 109–432, div. A, title IV, § 412(a),Dec. 20, 2006, 120 Stat. 2963; Pub. L. 111–312, title III, § 301(a),Dec. 17, 2010, 124 Stat. 3300.)
2010—Subsec. (a)(3)(C). Pub. L. 111–312amended subsec. (a)(3)(C) to read as if amendment by Pub. L. 107–16, § 542(e)(2)(A), had never been enacted. See 2001 Amendment note below.
2006—Subsec. (b)(3). Pub. L. 109–432struck out “before January 1, 2011,” after “exchanged”.
Pub. L. 109–222added par. (3). Former par. (3) redesignated (4).
Subsec. (b)(4). Pub. L. 109–222redesignated par. (3) as (4).
2002—Subsec. (b)(1)(B)(i). Pub. L. 107–147substituted “1256(b)))” for “1256(b))”.
2001—Subsec. (a)(3)(C). Pub. L. 107–16, § 542(e)(2)(A), inserted “(other than by reason of section 1022)” after “is determined”.
1999—Pub. L. 106–170designated existing provisions as subsec. (a), inserted heading, and added pars. (6) to (8) and subsec. (b).
1981—Pars. (5), (6). Pub. L. 97–34redesignated par. (6) as (5) and struck out former par. (5), which excluded from definition of “capital asset” an obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, and is covered by section 1232 (a)(4)(B) of this title.
1976—Par. (5). Pub. L. 94–455, § 1901(c)(9), struck out “or Territory,” after “State”.
Par. (6). Pub. L. 94–455, § 2132(a), added par. (6).
1969—Par. (3). Pub. L. 91–172inserted reference to a letter or memorandum, added subpar. (B) dealing with a letter or memorandum, and redesignated former subpar. (B) as (C).
Effective Date of 2010 Amendment
Amendment by Pub. L. 111–312applicable to estates of decedents dying, and transfers made after Dec. 31, 2009, except as otherwise provided, see section 301(e) ofPub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title.
Effective Date of 2006 Amendment
Pub. L. 109–432, div. A, title IV, § 412(b),Dec. 20, 2006, 120 Stat. 2963, provided that: “The amendment made by this section [amending this section] shall take effect as if included in section 204 of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109–222].”
Amendment by Pub. L. 109–222applicable to sales and exchanges in taxable years beginning after May 17, 2006, see section 204(c) ofPub. L. 109–222, set out as a note under section 170 of this title.
Effective Date of 2001 Amendment
Amendment by Pub. L. 107–16applicable to estates of decedents dying after Dec. 31, 2009, see section 542(f)(1) ofPub. L. 107–16, set out as a note under section 121 of this title.
Effective Date of 1999 Amendment
Amendment by Pub. L. 106–170applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) ofPub. L. 106–170, set out as a note under section 170 of this title.
Effective Date of 1981 Amendment
Amendment by Pub. L. 97–34applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 ofPub. L. 97–34, set out as an Effective Date note under section 1092 of this title.
Effective Date of 1976 Amendment
Pub. L. 94–455, title XXI, § 2132(b),Oct. 4, 1976, 90 Stat. 1925, provided that: “The amendment made by subsection (a) [amending this section] shall apply to sales, exchanges, and contributions made after the date of enactment of this Act [Oct. 4, 1976].”
Effective Date of 1969 Amendment