1RC section 1256(c)(2) provides that where two or more section 1256 contracts
are part of a straddle and "the taxpayer takes delivery under or exercises any of such contracts each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.
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
Any position from which all of the appreciation is accounted for under marked to market rules, including IRC Section 1256 contracts
(regulated futures contract, foreign currency contract, non-equity option, dealer equity option, or dealer securities futures contract).
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.
Securities futures contracts (or options on such contracts) generally are not treated as IRC Section 1256 contracts
(an exception to the general rule exists for dealer securities futures contracts).
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.
If the straddle is made up solely of IRC Section 1256 contracts
(see Q 7698), it will be taxed as explained in Q 7701.
Now the accrual basis for book purposes contrasts with mark-to-market taxability of Internal Revenue code section 1256 contracts
, treatment of currency gain or loss as interest income or expense and other novel tax law changes.
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)