diff --git a/lib/active_record/connection_adapters/sqlserver/transaction.rb b/lib/active_record/connection_adapters/sqlserver/transaction.rb
index 81a58e968..3d5052ab0 100644
--- a/lib/active_record/connection_adapters/sqlserver/transaction.rb
+++ b/lib/active_record/connection_adapters/sqlserver/transaction.rb
@@ -14,7 +14,15 @@ def sqlserver?
       def current_isolation_level
         return unless sqlserver?
         level = connection.user_options_isolation_level
-        level.blank? ? 'READ COMMITTED' : level.upcase
+
+        # When READ_COMMITTED_SNAPSHOT is set to ON,
+        # user_options_isolation_level will be equal to 'read committed
+        # snapshot' which is not a valid isolation level
+        if level.blank? || level == 'read committed snapshot'
+          'READ COMMITTED'
+        else
+          level.upcase
+        end
       end
 
     end
diff --git a/test/cases/transaction_test_sqlserver.rb b/test/cases/transaction_test_sqlserver.rb
index 6db739bfb..e16a63a53 100644
--- a/test/cases/transaction_test_sqlserver.rb
+++ b/test/cases/transaction_test_sqlserver.rb
@@ -52,6 +52,31 @@ class TransactionTestSQLServer < ActiveRecord::TestCase
     connection.user_options_isolation_level.must_match %r{read committed}i
   end
 
+  describe 'when READ_COMMITTED_SNAPSHOT is set' do
+    before do
+      connection.execute "ALTER DATABASE [#{connection.current_database}] SET ALLOW_SNAPSHOT_ISOLATION ON"
+      connection.execute "ALTER DATABASE [#{connection.current_database}] SET READ_COMMITTED_SNAPSHOT ON WITH ROLLBACK IMMEDIATE"
+    end
+
+    after do
+      connection.execute "ALTER DATABASE [#{connection.current_database}] SET ALLOW_SNAPSHOT_ISOLATION OFF"
+      connection.execute "ALTER DATABASE [#{connection.current_database}] SET READ_COMMITTED_SNAPSHOT OFF WITH ROLLBACK IMMEDIATE"
+    end
+
+    it 'should use READ COMMITTED as an isolation level' do
+      connection.user_options_isolation_level.must_match "read committed snapshot"
+
+      Ship.transaction(isolation: :serializable) do
+        Ship.create! name: 'Black Pearl'
+      end
+
+      # We're actually testing that the isolation level was correctly reset to
+      # "READ COMMITTED", and that no exception was raised (it's reported back
+      # by SQL Server as "read committed snapshot").
+      connection.user_options_isolation_level.must_match "read committed snapshot"
+    end
+  end
+
 
   protected