### Question
What does hedging transaction mean?


### Answer
**Hedging transaction** has the following meaning in *26 U.S.C. § 1256*:

> any transaction if—


(A) such transaction is entered into by the taxpayer in the normal course of the taxpayer's trade or business primarily—


(i) to reduce risk of price change or currency fluctuations with respect to property which is held or to be held by the taxpayer, or


(ii) to reduce risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer,


  

(B) the gain or loss on such transactions is treated as ordinary income or loss, and


(C) before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction

#### Citation:
  - *26 U.S.C. § 1256*
  - Heading: **Subtitle A-Income Taxes > CHAPTER 1-NORMAL TAXES AND SURTAXES > Subchapter P-Capital Gains and Losses > PART IV-SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES**

