If the identified position is used to settle the contract, the benefit of the loss should be realized as an adjustment to the taxpayer's realized gain or loss
on the deemed disposition of the identified position for its FMV.
As the ED on accounting for debt and equity securities points out, market-value accounting actually is less volatile in the period in which the gains and losses are realized than it is to recognize all realized gain or loss
in one period.
The realized gain or loss
is the difference between the amount realized and the taxpayer's adjusted basis in the property; no COD income is realized.
However, if the transaction is not pursuant to the decree, it is a sale; thus, P will recognize any realized gain or loss
and A's basis in the portion of the property transferred is the FMV (or the amount paid).
If the hedging instrument is disposed of within a reasonable period (seven days), however, the taxpayer should match the realized gain or loss
on the hedging transaction with the gain or loss on the disposed item.