tax straddle

Tax straddle

Technique used in futures and options trading to create tax benefits. For example, an investor with a capital gain takes a position creating an artificial offsetting loss in the current tax year and postponing a gain from the position until the next tax year.

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Tax Straddle

A practice in which two futures or options contracts, one expected to gain and one expected to lose, are sold in two different tax years. The contract expected to lose is sold at the end of one tax year while the one showing a gain is sold at the beginning of the following year. This is done in order to avoid taxation on a futures or option until the following year. This was formerly a common practice until the IRS began to require that all open positions be treated as if they were closed on the last day of the tax year for tax purposes. See also: Form 6781.

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tax straddle

A combination of two similar futures contracts (one bought and one sold) that tend to move in opposite directions so that a loss on one is offset by a gain in the other. The contract showing the loss is sold in the current year (shortly before year's end), while the contract showing the gain is sold in the next year. The net effect is to push taxes back one year. This practice ended with legislation that requires all gains and losses in futures contracts to be realized for tax purposes at the end of each year. Compare mark to the market.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.