On July 10, 1985, A enters into an offsetting section 1256 contract
and makes a valid election to treat the straddle as a section 1092(b)(2) identified mixed straddle.
A forward contract in any minor currency will not be a section 1256 contract
because no regulated futures contracts in any minor currency trade on any exchange; thus, it will not be subject to any mark-to-market requirement.
in which at least one (but not all) of the positions is an IRC Section 1256 contract
To accomplish this, any IRC Section 1256 contract
that has not been terminated or transferred before the end of the tax year is treated as if it were sold for its fair market value on the last business day of that year.
A taxpayer other than a corporation, estate or trust (section 1212(c)) may elect to carry back a "net section 1256 contracts
loss" to each of the three taxable years preceding the loss year to offset any net section 1256 contract
gain in those years.
Although IRC Section 1256 contracts
are excluded from the definition of an appreciated financial position under IRC Section 1259(b)(2)(B) (see Q 7708) depending on the taxpayer's other holdings, it would appear that a constructive sale could result from entering into an IRC Section 1256 contract
to deliver property that is the same as or substantially identical to an appreciated financial position held by the taxpayer.
PROPERTY SUBJECT TO STRADDLE RULES Section 1256 Contracts
Non-Section 1256 Property Regulated futures contracts Stock options Nonequity option contracts (see Q 1068) Other equity options (see Q 1067) Foreign currency contracts Direct ownership of stock--but only when Dealer equity options at least one offsetting position is: 1) an option (other than a qualified covered call option) on such stock or on substantially similar stock or securities; 2) substantially similar property; or 3) stock of certain corporations which take positions that offset positions held by Shareholders (see Q 1078) Forward contracts Other actively traded personal property which is not a Section 1256 contract
Securities futures contracts (see Q 1072)
Andrea Kramer of McDermott Will & Emery LLP discusses popular financial products and their uses; section 1256 contracts
and the tax straddle rules; the mark-to-market rules; the special rules for commodities derivatives dealers; the tax treatment of supplies and tax hedges; and the effect Dodd-Frank has on certain popular financial products.
These options are considered "IRC Section 1256 contracts
The taxpayers took the position that because the euro is a "major" currency traded on the interbank market, its options are section 1256 contracts
that must be marked to market (allowing them to recognize a loss), and because the krone is a "minor" currency its options are not section 1256 contracts
and are not marked to market (enabling them to avoid recognizing a gain).
Taxation as a Financial Instrument: Section 1256 Contracts
Five forms (Schedule J; Forms 8271, Investor Reporting of Tax Shelter Registration Number; 8582-CR, Passive Activity Credit Limitation; 6781, Gains and Losses from section 1256 Contracts
and Straddles; and 8586, Low-Income Housing Credit) will be added to e-filing for the 2000 filing season.