Any loss with respect to 1 or more positions shall be taken into account for any taxable year only to the extent that the amount of such loss exceeds the unrecognized gain (if any) with respect to 1 or more positions which were offsetting positions with respect to 1 or more positions from which the loss arose.
Any loss which may not be taken into account under subparagraph (A) for any taxable year shall, subject to the limitations under subparagraph (A), be treated as sustained in the succeeding taxable year.
In the case of any straddle which is an identified straddle—
(i) paragraph (1) shall not apply with respect to positions comprising the identified straddle,
(ii) if there is any loss with respect to any position of the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased by an amount which bears the same ratio to the loss as the unrecognized gain with respect to such offsetting position bears to the aggregate unrecognized gain with respect to all such offsetting positions,
(iii) if the application of clause (ii) does not result in an increase in the basis of any offsetting position in the identified straddle, the basis of each of the offsetting positions in the identified straddle shall be increased in a manner which—
(I) is reasonable, consistent with the purposes of this paragraph, and consistently applied by the taxpayer, and
(II) results in an aggregate increase in the basis of such offsetting positions which is equal to the loss described in clause (ii), and
(iv) any loss described in clause (ii) shall not otherwise be taken into account for purposes of this title.
The term "identified straddle" means any straddle—
(i) which is clearly identified on the taxpayer's records as an identified straddle before the earlier of—
(I) the close of the day on which the straddle is acquired, or
(II) such time as the Secretary may prescribe by regulations.
(ii) to the extent provided by regulations, the value of each position of which (in the hands of the taxpayer immediately before the creation of the straddle) is not less than the basis of such position in the hands of the taxpayer at the time the straddle is created, and
(iii) which is not part of a larger straddle.
A straddle shall be treated as clearly identified for purposes of clause (i) only if such identification includes an identification of the positions in the straddle which are offsetting with respect 1 other positions in the straddle.
Except as otherwise provided by the Secretary, rules similar to the rules of clauses (ii) and (iii) of subparagraph (A) shall apply for purposes of this paragraph with respect to any position which is, or has been, a liability or obligation.
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations or other guidance may specify the proper methods for clearly identifying a straddle as an identified straddle (and for identifying the positions comprising such straddle), the rules for the application of this section to a taxpayer which fails to comply with those identification requirements, the rules for the application of this section to a position which is or has been a liability or obligation, methods of loss allocation which satisfy the requirements of subparagraph (A)(iii), and the ordering rules in cases where a taxpayer disposes (or otherwise ceases to be the holder) of any part of any position which is part of an identified straddle.
For purposes of this subsection—
The term "unrecognized gain" means—
(i) in the case of any position held by the taxpayer as of the close of the taxable year, the amount of gain which would be taken into account with respect to such position if such position were sold on the last business day of such taxable year at its fair market value, and
(ii) in the case of any position with respect to which, as of the close of the taxable year, gain has been realized but not recognized, the amount of gain so realized.
For purposes of paragraph (2)(A)(ii), the unrecognized gain with respect to any offsetting position shall be the excess of the fair market value of the position at the time of the determination over the fair market value of the position at the time the taxpayer identified the position as a position in an identified straddle.
Each taxpayer shall disclose to the Secretary, at such time and in such manner and form as the Secretary may prescribe by regulations—
(I) each position (whether or not part of a straddle) with respect to which, as of the close of the taxable year, there is unrecognized gain, and
(II) the amount of such unrecognized gain.
Clause (i) shall not apply—
(I) to any position which is part of an identified straddle,
(II) to any position which, with respect to the taxpayer, is property described in paragraph (1) or (2) of section 1221(a) or to any position which is part of a hedging transaction (as defined in section 1256(e)), or
(III) with respect to any taxable year if no loss on a position (including a regulated futures contract) has been sustained during such taxable year or if the only loss sustained on such position is a loss described in subclause (II).
The Secretary shall prescribe such regulations with respect to gain or loss on positions which are a part of a straddle as may be appropriate to carry out the purposes of this section and section 263(g). To the extent consistent with such purposes, such regulations shall include rules applying the principles of subsections (a) and (d) of section 1091 and of subsections (b) and (d) of section 1233.
The regulations prescribed under paragraph (1) shall provide that—
(i) the taxpayer may offset gains and losses from positions which are part of mixed straddles—
(I) by straddle-by-straddle identification, or
(II) by the establishment (with respect to any class of activities) of a mixed straddle account for which gains and losses would be recognized (and offset) on a periodic basis,
(ii) such offsetting will occur before the application of section 1256, and section 1256(a)(3) will only apply to net gain or net loss attributable to section 1256 contracts, and
(iii) the principles of section 1233(d) shall not apply with respect to any straddle identified under clause (i)(I) or part of an account established under clause (i)(II).
In the case of any mixed straddle account referred to in subparagraph (A)(i)(II)—
In no event shall more than 50 percent of the net gain from such account for any taxable year be treated as long-term capital gain.
In no event shall more than 40 percent of the net loss from such account for any taxable year be treated as short-term capital loss.
The regulations prescribed under paragraph (1) may treat as a mixed straddle positions not described in section 1256(d)(4).
The regulations prescribed under paragraph (1) shall include regulations relating to the timing and character of gains and losses in case of straddles where at least 1 position is ordinary and at least 1 position is capital.
For purposes of this section—
The term "straddle" means offsetting positions with respect to personal property.
A taxpayer holds offsetting positions with respect to personal property if there is a substantial diminution of the taxpayer's risk of loss from holding any position with respect to personal property by reason of his holding 1 or more other positions with respect to personal property (whether or not of the same kind).
In the case of any position which is not part of an identified straddle (within the meaning of subsection (a)(2)(B)), such position shall not be treated as offsetting with respect to any position which is part of an identified straddle.
For purposes of paragraph (2), 2 or more positions shall be presumed to be offsetting if—
(i) the positions are in the same personal property (whether established in such property or a contract for such property),
(ii) the positions are in the same personal property, even though such property may be in a substantially altered form,
(iii) the positions are in debt instruments of a similar maturity or other debt instruments described in regulations prescribed by the Secretary,
(iv) the positions are sold or marketed as offsetting positions (whether or not such positions are called a straddle, spread, butterfly, or any similar name),
(v) the aggregate margin requirement for such positions is lower than the sum of the margin requirements for each such position (if held separately), or
(vi) there are such other factors (or satisfaction of subjective or objective tests) as the Secretary may by regulations prescribe as indicating that such positions are offsetting.
For purposes of the preceding sentence, 2 or more positions shall be treated as described in clause (i), (ii), (iii), or (vi) only if the value of 1 or more of such positions ordinarily varies inversely with the value of 1 or more other such positions.
Any presumption established pursuant to subparagraph (A) may be rebutted.
If—
(i) all the offsetting positions making up any straddle consist of 1 or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and
(ii) such straddle is not part of a larger straddle,
such straddle shall not be treated as a straddle for purposes of this section and section 263(g).
For purposes of subparagraph (A), the term "qualified covered call option" means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if—
(i) such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph,
(ii) such option is granted more than 30 days before the day on which the option expires,
(iii) such option is not a deep-in-the-money option,
(iv) such option is not granted by an options dealer (within the meaning of section 1256(g)(8)) in connection with his activity of dealing in options, and
(v) gain or loss with respect to such option is not ordinary income or loss.
For purposes of subparagraph (B), the term "deep-in-the-money option" means an option having a strike price lower than the lowest qualified bench mark.
Except as otherwise provided in this subparagraph, for purposes of subparagraph (C), the term "lowest qualified bench mark" means the highest available strike price which is less than the applicable stock price.
In the case of an option—
(I) which is granted more than 90 days before the date on which such option expires, and
(II) with respect to which the strike price is more than $50,
the lowest qualified bench mark is the second highest available strike price which is less than the applicable stock price.
If—
(I) the applicable stock price is $25 or less, and
(II) but for this clause, the lowest qualified bench mark would be less than 85 percent of the applicable stock price,
the lowest qualified bench mark shall be treated as equal to 85 percent of the applicable stock price.
If—
(I) the applicable stock price is $150 or less, and
(II) but for this clause, the lowest qualified bench mark would be less than the applicable stock price reduced by $10,
the lowest qualified bench mark shall be treated as equal to the applicable stock price reduced by $10.
Subparagraph (A) shall not apply to any straddle for purposes of section 1092(a) if—
(i) the qualified covered call options referred to in such subparagraph are closed or the stock is disposed of at a loss during any taxable year,
(ii) gain on disposition of the stock to be purchased from the taxpayer under such options or gains on such options are includible in gross income for a later taxable year, and
(iii) such stock or option was not held by the taxpayer for 30 days or more after the closing of such options or the disposition of such stock.
For purposes of the preceding sentence, the rules of paragraphs (3) (other than subparagraph (B) 2 thereof) and (4) of section 246(c) shall apply in determining the period for which the taxpayer holds the stock.
For purposes of this paragraph, the term "strike price" means the price at which the option is exercisable.
For purposes of subparagraph (D), the term "applicable stock price" means, with respect to any stock for which an option has been granted—
(i) the closing price of such stock on the most recent day on which such stock was traded before the date on which such option was granted, or
(ii) the opening price of such stock on the day on which such option was granted, but only if such price is greater than 110 percent of the price determined under clause (i).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations may include modifications to the provisions of this paragraph which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes.
For purposes of this section—
The term "personal property" means any personal property of a type which is actively traded.
The term "position" means an interest (including a futures or forward contract or option) in personal property.
For purposes of paragraph (1)—
In the case of stock, the term "personal property" includes stock only if—
(i) such stock is of a type which is actively traded and at least 1 of the positions offsetting such stock is a position with respect to such stock or substantially similar or related property, or
(ii) such stock is of a corporation formed or availed of to take positions in personal property which offset positions taken by any shareholder.
For purposes of determining whether subsection (e) applies to any transaction with respect to stock described in subparagraph (A)(ii), all includible corporations of an affiliated group (within the meaning of section 1504(a)) shall be treated as 1 taxpayer.
In determining whether 2 or more positions are offsetting, the taxpayer shall be treated as holding any position held by a related person.
For purposes of subparagraph (A), a person is a related person to the taxpayer if with respect to any period during which a position is held by such person, such person—
(i) is the spouse of the taxpayer, or
(ii) files a consolidated return (within the meaning of section 1501) with the taxpayer for any taxable year which includes a portion of such period.
If part or all of the gain or loss with respect to a position held by a partnership, trust, or other entity would properly be taken into account for purposes of this chapter by a taxpayer, then, except to the extent otherwise provided in regulations, such position shall be treated as held by the taxpayer.
In the case of a straddle at least 1 (but not all) of the positions of which are section 1256 contracts, the provisions of this section shall apply to any section 1256 contract and any other position making up such straddle.
For purposes of subsection (a)(2) (relating to identified straddles), subparagraph (A) and section 1256(a)(4) shall not apply to a straddle all of the offsetting positions of which consist of section 1256 contracts.
The term "section 1256 contract" has the meaning given such term by section 1256(b).
For purposes of paragraph (2), an obligor's interest in a nonfunctional currency denominated debt obligation is treated as a position in the nonfunctional currency.
For purposes of paragraph (1), foreign currency for which there is an active interbank market is presumed to be actively traded.
For purposes of subsection (a), if a taxpayer settles a position which is part of a straddle by delivering property to which the position relates (and such position, if terminated, would result in a realization of a loss), then such taxpayer shall be treated as if such taxpayer—
(A) terminated the position for its fair market value immediately before the settlement, and
(B) sold the property so delivered by the taxpayer at its fair market value.
This section shall not apply in the case of any hedging transaction (as defined in section 1256(e)).
If a taxpayer holds any stock and grants a qualified covered call option to purchase such stock with a strike price less than the applicable stock price—
Any loss with respect to such option shall be treated as long-term capital loss if, at the time such loss is realized, gain on the sale or exchange of such stock would be treated as long-term capital gain.
The holding period of such stock shall not include any period during which the taxpayer is the grantor of such option.
(Added Pub. L. 97–34, title V, §501(a), Aug. 13, 1981, 95 Stat. 323; amended Pub. L. 97–448, title I, §105(a)(1)(A)–(C), (2)–(4), Jan. 12, 1983, 96 Stat. 2384, 2385; Pub. L. 98–369, div. A, title I, §§101(a)–(d), 102(e)(2), 103(a), 107(a), July 18, 1984, 98 Stat. 616–619, 624, 627, 629; Pub. L. 99–514, title III, §331(a), title XII, §1261(b), title XVIII, §§1808(c), 1899A(66), Oct. 22, 1986, 100 Stat. 2220, 2591, 2817, 2962; Pub. L. 100–647, title VI, §6130(c), Nov. 10, 1988, 102 Stat. 3719; Pub. L. 105–34, title XII, §1271(b)(9), Aug. 5, 1997, 111 Stat. 1037; Pub. L. 106–170, title V, §532(c)(1)(F), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, §1(a)(7) [title IV, §401(e)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649; Pub. L. 108–357, title VIII, §888(a)–(c)(1), Oct. 22, 2004, 118 Stat. 1642, 1643; Pub. L. 109–135, title IV, §403(ii), Dec. 21, 2005, 119 Stat. 2632; Pub. L. 110–172, §7(d), Dec. 29, 2007, 121 Stat. 2482.)
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