Capital Gains and Losses – The “Sale or Exchange” Requirement

Abstract

By virtue of Internal Revenue Code (IRC) section 1222, capital gains and losses arise from "the sale or exchange" of capital assets. Because this statutory requirement is clearly satisfied by most routine dispositions of investment assets, such as sales of securities on a securities exchange or over the counter, it is easily overlooked in peripheral situations-for example, termination of the taxpayer's interest in a capital asset by theft, abandonment, or condemnation-that do not constitute a conventional "sale or exchange." Moreover, Congress has dispensed with the technical requirement of a "sale or exchange" in many of these peripheral situations, so that its residual importance in a few remaining circumstances can be a trap for the unwary.