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." The special termination rule applies only where a taxpayer takes delivery of the underlying asset of a
section 1256 contract.
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." See Q 7697.
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 ContractsAny 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.
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).6 Thus, holders of these contracts are not subject to the mark-to-market rules of IRC Section 1256.