Can Section 453 be used for the sale of a large portfolio of publicly traded stocks, and what are the restrictions?

Question

Tyler Smith · Accepted Answer

Section 453 generally allows for the deferral of gain from the sale of property where at least one payment is received after the tax year of the sale. However, there are significant restrictions when it comes to publicly traded stocks, which are considered 'marketable securities' under the tax code.

Specifically, Section 453(k)(2) explicitly states that the installment method cannot be used for sales of 'stock or securities traded on an established securities market.' This means that if you sell a large portfolio of stocks that are publicly traded, you cannot use an installment sale to defer the capital gains. The gain from such sales must be recognized in the year of the sale, regardless of when you receive the actual cash payments from the buyer.

The rationale behind this restriction is to prevent taxpayers from artificially deferring income on highly liquid assets that could be readily converted to cash. The IRS views these assets as having a fair market value that is easily ascertainable and thus, the gain should be recognized immediately. This rule applies uniformly whether the sale is to an unrelated party or a related party. Therefore, while Section 453 is a powerful tool for deferring gains on many types of assets, it is not applicable to publicly traded stocks or other marketable securities. Sellers looking to manage tax liability on such assets would need to explore alternative strategies, such as tax loss harvesting or charitable giving, which are outside the scope of Section 453.