The real advantage of using mark-to-market accounting is that traders can claim losses as ordinary losses, and can be freed from concerns about the wash sale rule, constructive sale rule
1259(c)(3), the constructive sale rule does not apply to certain short-term hedges.
The constructive sale rules are designed to prevent a taxpayer from entering into long-term hedging transactions that would defer gain indefinitely while substantially reducing or eliminating the risk of loss.
In his 2001 article Frictions as a Constraint on Tax Planning, Dean Schizer notes how taxpayers can approximate a short sale against the box, but still avoid the constructive sale rules, with an equity collar.
Here, there is a spread of $6 between the two exercise prices--probably enough of a spread to avoid the constructive sale rules.
Despite the similarities, the short-sale triggers the constructive sale rules, whereas the equity collar does not.
Applying the constructive sale rules of section 1259 to the implicit short sale means that Maya would be treated as having sold up to 7678 shares of ABC stock.
For purposes of the constructive sale rules, any potential constructive sale transaction during the tax year will be disregarded if:
Currently, a "collar" is being used to avoid the constructive sale rules.
As long as both the upside and the downside potential are at least 10%, it presumes that the constructive sale rules will not be triggered.
This appears to work; however, caution must be exercised so as not to violate the constructive sale rules.
The constructive sale rules
do not apply to sales that close within 30 days after the end of the tax year, if the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date the transaction is closed, and his risk of loss is not reduced at any time during the 60-day period (as described in Sec.