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Income tax treatment of your gains or losses on
each contract will be different depending upon the
way your contract is closed out. There are ways
to close out a contract in which you have a gain
so that it will be taxed as a long term capital
gain. For the contract in which you have a loss,
you may liquidate so as to have ordinary loss.
Depending upon your tax bracket, your risk of
after tax loss on both of these contracts will be
very substantially reduced and will quite possibly
be converted into an after tax gain. Any net pre-
tax profit will be significantly increased.
9. Can you give me an example ?
On February 15, 1978, the price of November 1978
gold was $188.30 per ounce (Wall Street Journal,
February 15, 1978 CMX). On the same date, the
price of February 1979 gold was 192.30 per ounce.
Seven months later on September 20, 1978, the
price of November 1978 gold was $212.70, and the
price of February 1979 gold was $217.90. If you
had sold November 1978 gold on February 15, 1978,
and bought February 1978 gold at the same time
then liquidated each contract on September 20,
1978, you would have incurred a loss of $24.40
($212.70 - $188.30) per ounce on your short posi-
tion and realized a gain of $25.60 per ounce on
your long position. Based on current tax rates,
and upon the assumption that you close out your
positions as described above, your net after tax
gain on your February 15, 1979 gold would have
been approximately $20.48 per ounce, and your net
after tax loss on November 1978 gold would have
been approximately $12.20 per ounce. The combined
after tax gain would have been $8.28 per ounce.
Considering there are 100 ounces of gold per
contract your net dollar profit would be $828.00
per spread. These figures do not include sales
and administrative fees which will be discussed
later.
10. What would have happened if I had bought November
1978 gold and sold February 1979 gold instead?
On your long (November) contract, you would have a
before tax gain of $24.40 per ounce, and on your
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Last modified: May 25, 2011