The Modernization of Derivatives Tax Act of 2026 overhauls how the federal government taxes derivative investments and related hedging strategies. The bill requires taxpayers to recognize gains and losses from derivatives as ordinary income when they sell, terminate, or transfer them, while creating special rules for "investment hedging units"—bundled packages of derivatives and underlying investments used for hedging purposes—that may receive modified treatment including suspended holding periods and potential deferral of built-in losses. The legislation also establishes new restrictions on claiming losses from straddles (offsetting investment positions), requires reporting of unrecognized gains to the IRS, and makes targeted adjustments for how regulated investment companies, real estate investment trusts, and corporations handle derivatives involving their own stock. The bill's main tax treatment rules take effect 90 days after enactment, with taxpayers required to identify their hedging units within that timeframe, while technical conforming changes apply shortly thereafter.
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