7578. How are spread transactions taxed?Nuco Employeercline212014-06-27T15:09:00Z2014-06-27T15:09:00Z36593762Summit Business Media318441314Site Map/Investments/Options/Option Spread TransactionsTaxFactsDefaultArticle2006-01-04T00:00:00Z121021071-00-tf2.xml1071.00;#1918;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2How are spread transactions taxed?
31000.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:42:58Z7578. How are spread transactions taxed?Generally, spread transactions are subject to the tax straddle rules to the extent that the positions in the spread are offsetting (see below). Consequently, certain spreads will apparently be subject to the constructive sale treatment of IRC Section 1259 (See Q 7605 to Q 7607).See IRC Sec. 1259(c)(1)(E); Conference Committee Report for TRA ’97.Generally, positions are offsetting if the taxpayer substantially reduces his or her risk of holding one position with respect to personal property by holding another position with respect to personal property, whether or not it is of the same type.IRC Sec. 1092(c). See Q 7586 for an explanation of the IRC definition of “offsetting” and Q 7592 for an explanation of the treatment of tax straddles.The Tax Court has taken the position that spread transactions are not “similar arrangements” within the meaning of IRC Section 465(b)(4), and that losses on stock option spreads are thus not limited by the “at risk” rules.See Resser v. Comm., TC Memo 1991-423; Laureys v. Comm., 92 TC 101 (1989), acq. in part, nonacq. in part, 1990-1 CB 1, footnotes 5 and 11. But the IRS, issuing a very limited partial acquiescence to the Laureys decision, noted its nonacquiescence as to whether offsetting positions in stock options are subject to the limitations of IRC Section 465(b)(4). See Q 7904 and Q 7905 for an explanation of the “at risk” rules.To the extent that one position of a spread is offset by only a portion of the other position, only those portions of the spread that offset one another will be treated as offsetting (and subject to the tax straddle rules) unless the position is part of a larger tax straddle.IRC Sec. 1092(c)(2)(B). Apparently, any options positions that are not offset by other positions will be taxed under the general rules governing equity options (See Q 7553 to Q 7574).Positions consisting entirely of options that are IRC Section 1256 contracts (i.e., dealer equity options and nonequity options) are exempt from the tax straddle rules and, instead, taxed under the mark-to-market rules in IRC Section 1256. Such positions will not constitute an “appreciated financial position” (See Q 7605), but may constitute a constructive sale of another position (see Q 7606). See Q 7585 for an explanation of IRC Section 1256 treatment. Spreads consisting of at least one, but not all, IRC Section 1256 contracts are subject to the rules for “mixed straddles.” For an explanation, see Q 7598.Aside from the special rules for IRC Section 1256 contracts (see above), it is clear that certain combinations of options (to be specified in future regulations) or options held contemporaneously with offsetting positions that have the effect of reducing both the taxpayer’s risk of loss and opportunity for gain, will trigger constructive sales treatment under IRC Section 1259, unless certain exceptions apply (See Q 7605 to Q 7607).IRC Sec. 1259(c)(1)(E).A spread transaction that is a straddle under IRC Section 1092(c) may also constitute a conversion transaction. See Q 7603 and Q 7604 for the definition and tax treatment of conversion transactions.