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Constructive Sale

Tax term that allows the IRS to recharacterize as a sale a transaction that eliminates the risk of loss and the opportunity for gain. This concept, which first appeared in the 1997 Taxpayer Relief Act, eliminated certain viable long-term stock-hedging strategies, such as a short against the box and equity swaps. Properly structured equity collars and prepaid forwards do not trigger constructive sale treatment, although the IRS could issue additional regulations.

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