Straddles

Any loss with respect to 1 or more positions shall be taken into account for any taxable year only to the extent that the amount of such loss exceeds the unrecognized gain (if any) with respect to 1 or more positions which were offsetting positions with respect to 1 or more positions from which the loss arose. Any loss which may not be taken into account under subparagraph (A) for any taxable year shall, subject to the limitations under subparagraph (A), be treated as sustained in the succeeding taxable year. paragraph (1) shall not apply with respect to positions comprising the identified straddle, if there is any loss with respect to any position of the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased by an amount which bears the same ratio to the loss as the unrecognized gain with respect to such offsetting position bears to the aggregate unrecognized gain with respect to all such offsetting positions, is reasonable, consistent with the purposes of this paragraph, and consistently applied by the taxpayer, and results in an aggregate increase in the basis of such offsetting positions which is equal to the loss described in clause (ii), and any loss described in clause (ii) shall not otherwise be taken into account for purposes of this title. the close of the day on which the straddle is acquired, or such time as the Secretary may prescribe by regulations. to the extent provided by regulations, the value of each position of which (in the hands of the taxpayer immediately before the creation of the straddle) is not less than the basis of such position in the hands of the taxpayer at the time the straddle is created, and which is not part of a larger straddle. Except as otherwise provided by the Secretary, rules similar to the rules of clauses (ii) and (iii) of subparagraph (A) shall apply for purposes of this paragraph with respect to any position which is, or has been, a liability or obligation. The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations or other guidance may specify the proper methods for clearly identifying a straddle as an identified straddle (and for identifying the positions comprising such straddle), the rules for the application of this section to a taxpayer which fails to comply with those identification requirements, the rules for the application of this section to a position which is or has been a liability or obligation, methods of loss allocation which satisfy the requirements of subparagraph (A)(iii), and the ordering rules in cases where a taxpayer disposes (or otherwise ceases to be the holder) of any part of any position which is part of an identified straddle. in the case of any position held by the taxpayer as of the close of the taxable year, the amount of gain which would be taken into account with respect to such position if such position were sold on the last business day of such taxable year at its fair market value, and in the case of any position with respect to which, as of the close of the taxable year, gain has been realized but not recognized, the amount of gain so realized. For purposes of paragraph (2)(A)(ii), the unrecognized gain with respect to any offsetting position shall be the excess of the fair market value of the position at the time of the determination over the fair market value of the position at the time the taxpayer identified the position as a position in an identified straddle. each position (whether or not part of a straddle) with respect to which, as of the close of the taxable year, there is unrecognized gain, and the amount of such unrecognized gain. to any position which is part of an identified straddle, to any position which, with respect to the taxpayer, is property described in paragraph (1) or (2) of section 1221(a) or to any position which is part of a hedging transaction (as defined in section 1256(e)), or with respect to any taxable year if no loss on a position (including a regulated futures contract) has been sustained during such taxable year or if the only loss sustained on such position is a loss described in subclause (II). The Secretary shall prescribe such regulations with respect to gain or loss on positions which are a part of a straddle as may be appropriate to carry out the purposes of this section and section 263(g). To the extent consistent with such purposes, such regulations shall include rules applying the principles of subsections (a) and (d) of section 1091 and of subsections (b) and (d) of section 1233. by straddle-by-straddle identification, or by the establishment (with respect to any class of activities) of a mixed straddle account for which gains and losses would be recognized (and offset) on a periodic basis, such offsetting will occur before the application of section 1256, and section 1256(a)(3) will only apply to net gain or net loss attributable to section 1256 contracts, and the principles of section 1233(d) shall not apply with respect to any straddle identified under clause (i)(I) or part of an account established under clause (i)(II). In no event shall more than 50 percent of the net gain from such account for any taxable year be treated as long-term capital gain. In no event shall more than 40 percent of the net loss from such account for any taxable year be treated as short-term capital loss. The regulations prescribed under paragraph (1) may treat as a mixed straddle positions not described in section 1256(d)(4). The regulations prescribed under paragraph (1) shall include regulations relating to the timing and character of gains and losses in case of straddles where at least 1 position is ordinary and at least 1 position is capital. The term “straddle” means offsetting positions with respect to personal property. A taxpayer holds offsetting positions with respect to personal property if there is a substantial diminution of the taxpayer’s risk of loss from holding any position with respect to personal property by reason of his holding 1 or more other positions with respect to personal property (whether or not of the same kind). In the case of any position which is not part of an identified straddle (within the meaning of subsection (a)(2)(B)), such position shall not be treated as offsetting with respect to any position which is part of an identified straddle. the positions are in the same personal property (whether established in such property or a contract for such property), the positions are in the same personal property, even though such property may be in a substantially altered form, the positions are in debt instruments of a similar maturity or other debt instruments described in regulations prescribed by the Secretary, the positions are sold or marketed as offsetting positions (whether or not such positions are called a straddle, spread, butterfly, or any similar name), the aggregate margin requirement for such positions is lower than the sum of the margin requirements for each such position (if held separately), or there are such other factors (or satisfaction of subjective or objective tests) as the Secretary may by regulations prescribe as indicating that such positions are offsetting. Any presumption established pursuant to subparagraph (A) may be rebutted. all the offsetting positions making up any straddle consist of 1 or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and such straddle is not part of a larger straddle, such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph, such option is granted more than 30 days before the day on which the option expires, such option is not a deep-in-the-money option, such option is not granted by an options dealer (within the meaning of section 1256(g)(8)) in connection with his activity of dealing in options, and gain or loss with respect to such option is not ordinary income or loss. For purposes of subparagraph (B), the term “deep-in-the-money option” means an option having a strike price lower than the lowest qualified bench mark. Except as otherwise provided in this subparagraph, for purposes of subparagraph (C), the term “lowest qualified bench mark” means the highest available strike price which is less than the applicable stock price. which is granted more than 90 days before the date on which such option expires, and with respect to which the strike price is more than $50, the applicable stock price is $25 or less, and but for this clause, the lowest qualified bench mark would be less than 85 percent of the applicable stock price, the applicable stock price is $150 or less, and but for this clause, the lowest qualified bench mark would be less than the applicable stock price reduced by $10, the qualified covered call options referred to in such subparagraph are closed or the stock is disposed of at a loss during any taxable year, gain on disposition of the stock to be purchased from the taxpayer under such options or gains on such options are includible in gross income for a later taxable year, and such stock or option was not held by the taxpayer for 30 days or more after the closing of such options or the disposition of such stock. For purposes of this paragraph, the term “strike price” means the price at which the option is exercisable. the closing price of such stock on the most recent day on which such stock was traded before the date on which such option was granted, or the opening price of such stock on the day on which such option was granted, but only if such price is greater than 110 percent of the price determined under clause (i). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations may include modifications to the provisions of this paragraph which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes. The term “personal property” means any personal property of a type which is actively traded. The term “position” means an interest (including a futures or forward contract or option) in personal property. such stock is of a type which is actively traded and at least 1 of the positions offsetting such stock is a position with respect to such stock or substantially similar or related property, or such stock is of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder. For purposes of determining whether subsection (e) applies to any transaction with respect to stock described in subparagraph (A)(ii), all includible corporations of an affiliated group (within the meaning of section 1504(a)) shall be treated as 1 taxpayer. In determining whether 2 or more positions are offsetting, the taxpayer shall be treated as holding any position held by a related person. is the spouse of the taxpayer, or files a consolidated return (within the meaning of section 1501) with the taxpayer for any taxable year which includes a portion of such period. If part or all of the gain or loss with respect to a position held by a partnership, trust, or other entity would properly be taken into account for purposes of this chapter by a taxpayer, then, except to the extent otherwise provided in regulations, such position shall be treated as held by the taxpayer. In the case of a straddle at least 1 (but not all) of the positions of which are section 1256 contracts, the provisions of this section shall apply to any section 1256 contract and any other position making up such straddle. For purposes of subsection (a)(2) (relating to identified straddles), subparagraph (A) and section 1256(a)(4) shall not apply to a straddle all of the offsetting positions of which consist of section 1256 contracts. The term “section 1256 contract” has the meaning given such term by section 1256(b). For purposes of paragraph (2), an obligor’s interest in a nonfunctional currency denominated debt obligation is treated as a position in the nonfunctional currency. For purposes of paragraph (1), foreign currency for which there is an active interbank market is presumed to be actively traded. terminated the position for its fair market value immediately before the settlement, and sold the property so delivered by the taxpayer at its fair market value. This section shall not apply in the case of any hedging transaction (as defined in section 1256(e)). Any loss with respect to such option shall be treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of such stock would be treated as long-term capital gain. The holding period of such stock shall not include any period during which the taxpayer is the grantor of such option. For provision requiring capitalization of certain interest and carrying charges where there is a straddle, see section 263(g). Except as otherwise provided in this subsection, the amendments made by this section [amending this section and sections 45, 45H, 179B, 280C, 470, 1016, and 6501 of this title] shall take effect as if included in the provisions of the American Jobs Creation Act of 2004 [Pub. L. 108–357] to which they relate. The amendment made by subsection (d)(2)(A) [amending this section] shall apply to straddles acquired after the date of the enactment of this Act [Dec. 29, 2007].” Except as otherwise provided in this subsection, the amendments made by this section [amending this section] shall apply to positions established after December 31, 1983, in taxable years ending after such date. In the case of any stock of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder, the amendments made by this section shall apply to positions established on or after May 23, 1983, in taxable years ending on or after such date. The amendment made by subsection (c) [amending this section] shall apply to positions established after June 30, 1984, in taxable years ending after such date. The amendment made by subsection (d) [amending this section] shall apply to positions established after the date of the enactment of this Act in taxable years ending after such date.” The Secretary of the Treasury or his delegate shall prescribe initial regulations under section 1092(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (including regulations relating to mixed straddles) not later than the date 6 months after the date of the enactment of this Act [July 18, 1984]. The regulations described in subsection (b) with respect to the application of section 1233 of the Internal Revenue Code of 1986 to mixed straddles shall not apply to mixed straddles all of the positions of which were established before January 1, 1984.” Except as otherwise provided in this section, the amendments made by this title [enacting this section and sections 1234A and 1256 of this title, amending sections 263, 341, 1212, 1221, 1231, 1232, 1233, 1236, and 6653 of this title, and enacting provisions set out as a note under section 1256 of this title] shall apply to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date. The amendments made by section 506 [amending section 1236 of this title] shall apply to property acquired by the taxpayer after the date of the enactment of this Act [Aug. 13, 1981] in taxable years ending after such date. Section 1256(e)(2)(C) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by this title) shall apply to property acquired and positions established by the taxpayer after December 31, 1981, in taxable years ending after such date. If the taxpayer so elects (at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe) with respect to all regulated futures contracts or positions held by the taxpayer on June 23, 1981, the amendments made by this title shall apply to all such contracts and positions, effective for periods after such date in taxable years ending after such date. For purposes of the preceding sentence, the term ‘regulated futures contract’ has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1986, and the term ‘position’ has the meaning given to such term by section 1092(d)(2) of such Code.” which were entered into before 1982 and form part of a straddle, and to which the amendments made by title V of the Economic Recovery Tax Act of 1981 [Pub. L. 97–34, see Effective Date note above] do not apply, For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business. If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduction (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer’s net gain or loss from all positions in such straddle. Except as otherwise provided in subsections (a) and (c) and in sections 1233 and 1234 of such Code, the determination of whether there is recognized gain or loss with respect to a position, and the amount and timing of such gain or loss, and the treatment of such gain or loss as long-term or short-term shall be made without regard to whether such position constitutes part of a straddle. For purposes of this section, the term ‘straddle’ has the meaning given to such term by section 1092(c) of the Internal Revenue Code of 1986 as in effect on the day after the date of the enactment of the Economic Recovery Tax Act of 1981 [Aug. 13, 1981], and shall include a straddle all the positions of which are regulated futures contracts. at any time before January 1, 1982, was an individual described in section 1402(i)(2)(B) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by this subtitle), or 1 or more individuals described in paragraph (1), and 1 or more members of the families (as so defined) of such individuals. For purposes of this section, the term ‘regulated futures contracts’ has the meaning given to such term by section 1256(b) of the Internal Revenue Code of 1986 (as in effect before the date of enactment of this Act [July 18, 1984]). For purposes of this section, any loss incurred by a person (other than a commodities dealer) with respect to an interest in a syndicate (within the meaning of section 1256(e)(3)(B) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) shall not be considered to be a loss incurred in a trade or business.” In the case of any straddle which is an identified straddle— if the application of clause (ii) does not result in an increase in the basis of any offsetting position in the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased in a manner which— The term “identified straddle” means any straddle— which is clearly identified on the taxpayer’s records as an identified straddle before the earlier of— For purposes of this subsection— The term “unrecognized gain” means— Each taxpayer shall disclose to the Secretary, at such time and in such manner and form as the Secretary may prescribe by regulations— Clause (i) shall not apply— The regulations prescribed under paragraph (1) shall provide that— the taxpayer may offset gains and losses from positions which are part of mixed straddles— In the case of any mixed straddle account referred to in subparagraph (A)(i)(II)— For purposes of this section— For purposes of paragraph (2), 2 or more positions shall be presumed to be offsetting if— If— For purposes of subparagraph (A), the term “qualified covered call option” means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if— In the case of an option— If— If— Subparagraph (A) shall not apply to any straddle for purposes of section 1092(a) if— For purposes of subparagraph (D), the term “applicable stock price” means, with respect to any stock for which an option has been granted— For purposes of this section— For purposes of paragraph (1)— In the case of stock, the term “personal property” includes stock only if— For purposes of subparagraph (A), a person is a related person to the taxpayer if with respect to any period during which a position is held by such person, such person— For purposes of subsection (a), if a taxpayer settles a position which is part of a straddle by delivering property to which the position relates (and such position, if terminated, would result in a realization of a loss), then such taxpayer shall be treated as if such taxpayer— If a taxpayer holds any stock and grants a qualified covered call option to purchase such stock with a strike price less than the applicable stock price— For purposes of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], in the case of any disposition of 1 or more positions— For purposes of this section, the term ‘commodities dealer’ means any taxpayer who— was a member of the family (within the meaning of section 704(e)(3) [now 704(e)(2)] of such Code) of an individual described in paragraph (1) to the extent such member engaged in commodities trading through an organization the members of which consisted solely of— (Source: (Added Pub. L. 97–34, title V, § 501(a), Aug. 13, 1981, 95 Stat. 323; amended Pub. L. 97–448, title I, § 105(a)(1)(A)–(C), (2)–(4), Jan. 12, 1983, 96 Stat. 2384, 2385; Pub. L. 98–369, div. A, title I, §§ 101(a)–(d), 102(e)(2), 103(a), 107(a), July 18, 1984, 98 Stat. 616–619, 624, 627, 629; Pub. L. 99–514, title III, § 331(a), title XII, § 1261(b), title XVIII, §§ 1808(c), 1899A(66), Oct. 22, 1986, 100 Stat. 2220, 2591, 2817, 2962; Pub. L. 100–647, title VI, § 6130(c), Nov. 10, 1988, 102 Stat. 3719; Pub. L. 105–34, title XII, § 1271(b)(9), Aug. 5, 1997, 111 Stat. 1037; Pub. L. 106–170, title V, § 532(c)(1)(F), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(e)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649; Pub. L. 108–357, title VIII, § 888(a)–(c)(1), Oct. 22, 2004, 118 Stat. 1642, 1643; Pub. L. 109–135, title IV, § 403(ii), Dec. 21, 2005, 119 Stat. 2632; Pub. L. 110–172, § 7(d), Dec. 29, 2007, 121 Stat. 2482; Pub. L. 115–141, div. U, title IV, § 401(a)(170), (171), Mar. 23, 2018, 132 Stat. 1192.))