26 U.S.C. § 1092 — Straddles

(a) Recognition of loss for straddles. (1) A loss on one or more positions may be counted for a tax year only to the extent it is greater than any unrecognized gain on offsetting positions that relate to the positions that produced the loss. Any part that cannot be counted is treated, subject to the same limit, as a loss sustained in the next tax year. (2) Identified straddles. For an identified straddle, paragraph (1) does not apply to its positions. If a position has a loss, increase the basis of each offsetting position by a share of that loss. Each share must bear the same ratio to the loss as that position's unrecognized gain bears to the total unrecognized gain on all offsetting positions. If this produces no basis increase for any offsetting position, increase the bases in a reasonable way that is consistent with this paragraph and applied consistently, with the total increase equal to the loss. The loss may not otherwise be counted under this title. An “identified straddle” is a straddle clearly marked in the taxpayer's records before the earlier of the end of the acquisition day or a time set by the Secretary; to the extent regulations require, each position's value immediately before creation is at least its basis when created; and the straddle is not part of a larger straddle. The identification must identify which positions offset other positions. Unless the Secretary provides otherwise, similar basis rules apply to a position that is or was a liability or obligation. The Secretary must issue needed regulations or other guidance, including rules for identification, failures to identify, liabilities and obligations, loss allocation, and the order of applying rules when a taxpayer disposes of, or stops holding, part of an identified straddle. (3) “Unrecognized gain” means, for a position held at the end of the tax year, the gain that would be counted if it were sold on the last business day at fair market value. For a position with gain realized but not recognized at year-end, it means that realized gain. For an identified straddle, the gain on an offsetting position is its fair market value when determined minus its fair market value when the taxpayer identified it. A taxpayer must report each position with unrecognized gain and its amount, at the time and in the form the Secretary requires. This reporting does not apply to an identified-straddle position; property described in section 1221(a)(1) or (2), or a position in a hedging transaction as defined in section 1256(e); or a tax year in which no position loss was sustained, or in which the only loss sustained on a position was a loss described in section 1221(a)(1) or (2), or a loss on a position that is part of a hedging transaction as defined in section 1256(e). (b) Regulations. (1) The Secretary must issue appropriate regulations for gains and losses on straddle positions to carry out this section and section 263(g). To the extent consistent with those purposes, the regulations must apply the principles of section 1091(a) and (d) and section 1233(b) and (d). (2) Mixed straddles. The regulations must allow a taxpayer to offset gains and losses from mixed-straddle positions either by identifying each straddle or by creating a mixed-straddle account for a class of activities, with periodic recognition and offsetting. The offset must occur before section 1256 applies, and section 1256(a)(3) applies only to net gain or loss attributable to section 1256 contracts. Section 1233(d) principles do not apply to a straddle identified under the first method or to a position in an account created under the second. For a mixed-straddle account, no more than 50 percent of annual net gain may be treated as long-term capital gain, and no more than 40 percent of annual net loss may be treated as short-term capital loss. The regulations may treat positions not described in section 1256(d)(4) as mixed-straddle positions. They must address the timing and character of gains and losses when at least one position is ordinary and at least one is capital. (c) Straddle defined. (1) A “straddle” is offsetting positions in personal property. (2) A taxpayer has offsetting positions when holding one or more other personal-property positions substantially reduces the taxpayer's risk of loss on a position, whether or not the property is the same kind. A position outside an identified straddle is not offsetting with respect to a position inside one. (3) Two or more positions are presumed offsetting if they concern the same property, including substantially altered property; are debt instruments with similar maturity or other instruments described by regulation; are sold or marketed as offsetting (whether called a straddle, spread, butterfly, or similar name); have a combined margin requirement lower than their separate requirements; or meet other regulatory factors or tests. For the same-property, altered-property, similar-debt, and regulatory-factor categories, one or more values must ordinarily move inversely to one or more other values. The presumption may be rebutted. (4) Certain covered calls. A straddle consisting only of one or more qualified covered call options and the stock to be bought under them is not treated as a straddle for this section or section 263(g), if it is not part of a larger straddle. A “qualified covered call option” is an option granted by the taxpayer to buy stock the taxpayer holds or acquires in granting the option, only if it is traded on a registered national securities exchange or another Secretary-approved market, granted more than 30 days before expiration, is not deep in the money, is not granted by an options dealer in its dealing activity, and has nonordinary gain or loss. A “deep-in-the-money option” has a strike price below the lowest qualified benchmark. The benchmark generally is the highest available strike price below the applicable stock price; it is the second-highest such price for an option granted more than 90 days before expiration with a strike price over $50; it is at least 85 percent of the applicable price when that price is $25 or less; and, when the applicable price is $150 or less, it is at least the applicable price minus $10. The Secretary may issue necessary regulations and adjust these rules for exchange-practice changes or to prevent tax avoidance. The exception does not apply for section 1092(a) if the options are closed or stock is sold at a loss, the related gain is included in a later year, and the stock or option was not held at least 30 days after the closing or disposition; section 246(c)(3) and (4) determine the holding period. “Strike price” means the exercise price. “Applicable stock price” means the most recent closing price before the option grant, or the grant-day opening price if it is more than 110 percent of that closing price. (d) Definitions and special rules. “Personal property” means actively traded personal property. A “position” is an interest, including a futures or forward contract or option, in personal property. Stock counts only if it is actively traded and an offsetting position concerns that stock or substantially similar or related property, or if it is stock of a corporation formed or used to take personal-property positions offsetting a shareholder's positions. For deciding whether subsection (e) applies to such stock transaction, all includible corporations in an affiliated group are one taxpayer. The taxpayer is treated as holding positions held by a related person. A related person is the taxpayer's spouse or a person filing a consolidated return with the taxpayer for a year covering part of the holding period. Unless regulations provide otherwise, a position held by a partnership, trust, or other entity is treated as held by the taxpayer when the taxpayer properly takes its gain or loss into account. If a straddle has at least one but not all positions that are section 1256 contracts, this section applies to each such contract and other position. For an identified straddle consisting entirely of section 1256 contracts, this section's paragraph (5)(A) and section 1256(a)(4) do not apply. “Section 1256 contract” has the meaning in section 1256(b). An obligor's interest in nonfunctional-currency debt is treated as a position in that currency, and currency with an active interbank market is presumed actively traded. If a taxpayer settles a straddle position by delivering related property and terminating it would realize a loss, the taxpayer is treated as terminating the position at fair market value immediately before settlement and selling the delivered property at fair market value. (e) This section does not apply to a hedging transaction as defined in section 1256(e). (f) If a taxpayer holds stock and grants a qualified covered call with a strike price below the applicable stock price, a loss on the option is long-term capital loss if stock gain would be long-term when the loss is realized. The stock holding period excludes the time the taxpayer is the option grantor. (g) Section 263(g) requires capitalization of certain interest and carrying charges when there is a straddle.