7593 / What is a “tax straddle”?

A “tax straddle” is the simultaneous ownership of offsetting interests (i.e., “positions”) in actively traded personal property. For this purpose, an “interest” may be ownership of the property itself or may be a regulated futures contract, a futures contract other than a regulated futures contract, a forward contract, or an option. Interests owned by an investor’s spouse, partnership, S corporation, or trust of which the investor is a deemed owner are treated as owned by the investor for purposes of determining whether a tax straddle exists.¹

Interests (i.e., positions) are offsetting if the risk of loss from owning any particular interest is substantially reduced by reason of the ownership of such other interest (or interests). Risk reduction through mere diversification is not considered to be substantial if the positions are not balanced. Interests may be treated as offsetting even though they or the underlying personal properties are not the same kind (e.g., ownership of silver and a futures contract to sell the same amount of silver; or a long futures contract for silver and a short futures contract for silver coins). If positions are not equally offsetting, the tax straddle rules will apply, under regulations yet to be issued, only to the extent the positions are balanced.²

Under the following circumstances, two or more positions will be presumed to be offsetting, unless the investor is able to show to the contrary:³ (1) the positions are in the same personal property and the value of one or more such positions ordinarily varies inversely with the value of one or more of other such positions; (2) the positions are in debt instruments of similar maturity (or other debt instruments described in future regulations) and the value of one or more such positions ordinarily varies inversely with the value of one or more of other such positions; (3) the positions are marketed as offsetting positions; or (4) the aggregate margin requirement for such positions is lower than the sum of the margin requirements for each such position if each position were held separately.

Direct ownership of stock may be exempted from the straddle rules. See Q 7594 for an explanation of when the rules will apply.

Section 1256 Contracts	Non-Section 1256 Property
Regulated futures contracts	Stock options
Nonequity option contracts (see Q 7582)	Other equity options (see Q 7581)
Foreign currency contracts	Direct ownership of stock — but only when
Dealer equity options	at least one offsetting position is:
	1) an option (other than a qualified covered call option) on such stock or on substantially similar stock or securities;
	2) substantially similar property; or
	3) stock of certain corporations which take positions that offset positions held by shareholders (see Q 7594)
	Forward contracts
	Other actively traded personal property which is
	not a Section 1256 contract
	Securities futures contracts (see Q 7586)