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 and straddles.
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.
For purposes of the
constructive sale rules, any potential constructive sale transaction during the tax year will be disregarded if:
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.