§ 1092. Straddles
(a)
Recognition of loss in case of straddles, etc.
(1)
Limitation on recognition of loss
(A)
In general
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.
(2)
Special rule for identified straddles
(A)
In general
In the case of any straddle which is an 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—
(B)
Identified straddle
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—
(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.
(C)
Application to liabilities and obligations
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.
(D)
Regulations
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.
(3)
Unrecognized gain
For purposes of this subsection—
(A)
In general
The term “unrecognized gain” means—
(B)
Special rule for identified straddles
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.
(C)
Reporting of gain
(i)
In general
Each taxpayer shall disclose to the Secretary, at such time and in such manner and form as the Secretary may prescribe by regulations—
(b)
Regulations
(1)
In general
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.
(2)
Regulations relating to mixed straddles
(A)
Elective provisions in lieu of section
1233
(d) principles
The regulations prescribed under paragraph (1) shall provide that—
(B)
Limitation on net gain or net loss from mixed straddle account
In the case of any mixed straddle account referred to in subparagraph (A)(i)(II)—
(c)
Straddle defined
For purposes of this section—
(2)
Offsetting positions
(A)
In general
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).
(3)
Presumption
(A)
In general
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.
(4)
Exception for certain straddles consisting of qualified covered call options and the optioned stock
(A)
In general
If—
(B)
Qualified covered call option defined
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,
(C)
Deep-in-the-money option
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.
(D)
Lowest qualified bench mark
(i)
In general
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.
(ii)
Special rule where option is for period more than 90 days and strike price exceeds $50
In the case of an option—
the lowest qualified bench mark is the second highest available strike price which is less than the applicable stock price.
(iii)
85 percent rule where applicable stock price $25 or less
If—
(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.
(E)
Special year-end rule
(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
(F)
Strike price
For purposes of this paragraph, the term “strike price” means the price at which the option is exercisable.
(G)
Applicable stock price
For purposes of subparagraph (D), the term “applicable stock price” means, with respect to any stock for which an option has been granted—
(H)
Regulations
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.
(d)
Definitions and special rules
For purposes of this section—
(1)
Personal property
The term “personal property” means any personal property of a type which is actively traded.
(2)
Position
The term “position” means an interest (including a futures or forward contract or option) in personal property.
(3)
Special rules for stock
For purposes of paragraph (1)—
(4)
Positions held by related persons, etc.
(A)
In general
In determining whether 2 or more positions are offsetting, the taxpayer shall be treated as holding any position held by a related person.
(B)
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—
(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.
(C)
Certain flowthrough entities
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.
(7)
Special rules for foreign currency
(8)
Special rules for physically settled positions
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—
(f)
Treatment of gain or loss and suspension of holding period where taxpayer grantor of qualified covered call option
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—
[1] So in original. Probably should be followed by “to”.
[2] See References in Text note below.