7602. What is an “identified straddle”? How is it taxed?Nuco Employeercline202014-10-01T14:45:00Z2014-10-01T14:45:00Z35853338Summit Business Media277391614Site Map/Investments/StraddlesTaxFactsDefaultArticle2006-01-04T00:00:00Z121151084-00-tf2.xml1084.00;#1842;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2What is an “identified straddle”? How is it taxed?47600.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:04:35Z7602. What is an “identified straddle”? How is it taxed?An “identified straddle” is a straddle in which (1) all the original positions are acquired on the same day; (2) all positions are clearly identified in the investor’s records as being part of an identified straddle before the close of that day (or other time prescribed by future regulations), including which positions are offsetting with respect to other positions in the straddle; (3) no position is part of a larger straddle; and (4) all positions remain open at the close of the year, or were closed out on the same day during the year.IRC Sec. 1092(a)(2)(B). Apparently, if a successor or substitute position replaces an original position of the straddle, the straddle ceases to be an identified straddle.See General Explanation – ERTA, p. 284.In the case of an identified straddle, the loss deferral and wash sale rules discussed in Q 7592 do not apply. Instead, any loss realized with respect to a position in an identified straddle is treated as sustained no earlier than the day on which all positions making up the straddle are disposed of.IRC Sec. 1092(a)(2)(A).The tax straddle short sale rules discussed in Q 7592 apply to identified straddles.See Temp. Treas. Reg. §1.1092(b)-2T.While the IRC does not plainly set forth the application of the constructive sales rules of IRC Section 1259 to identified straddles, Congress’ intent is, apparently, that a straddle designated as an identified tax straddle under IRC Section 1092(a)(2) will be treated as a constructive sale of an appreciated financial position under IRC Section 1259. This generally results in immediate gain recognition, the start of a new holding period, and an adjustment to basis (unless certain requirements are met for closing out the position constituting the constructive sale)General Explanation of Tax Legislation Enacted in 1997 (JCS-23-97), p. 176-177 (the 1997 Blue Book). (see Q 7605 to Q 7607).The Blue Book states that where either position in such an identified transaction is an appreciated financial position and a constructive sale of that position results from acquiring the second position, Congress intended that the constructive sale would be treated as having occurred immediately before the identified transaction. It adds that the constructive sale will not prevent qualification of the transaction as an identified straddle transaction. It is also the intent of Congress that future regulations will clarify the extent to which straddle transactions will be subject to or excepted from the constructive sale provisions.See 1997 Blue Book, p. 177. Future regulations may clarify the manner in which these rules may be applied to identified straddles.A portion of any gain recognized upon disposition or other termination of a straddle that is part of a conversion transaction (see Q 7603) may be treated as ordinary income. According to the IRC, these rules are applicable where substantially all of the taxpayer’s expected return from the investment is attributable to the time value of the taxpayer’s net investment in the transaction.IRC Sec. 1258(c). See Q 7603 and Q 7604 for the definition and tax treatment of conversion transactions.Note: Do not confuse “identified straddles,” discussed above, with what the Temporary Regulations refer to as an “IRC Section 1092(b)(2) identified mixed straddle.” The latter is discussed in Q 7601.