7605 / What is a “mixed” straddle? What tax choices are available to the owner?
Basically, an owner of a mixed straddle has three initial choices to make:
(1) The owner may elect to exclude the IRC Section 1256 contract (or contracts) from the mark-to-market tax rules explained in Q 7592 and have all the positions in the straddle taxed under the loss deferral, wash sale, and short sale rules of IRC Section 1092 (see Q 7599). This election is available only where the investor has identified in records all the positions in the mixed straddle before the close of the day on which the first IRC Section 1256 contract forming part of the straddle is acquired.2(2) If the mixed straddle also qualifies as an “identified tax straddle,” the owner may elect (subject to the conditions described in (1), above) to exclude the IRC Section 1256 contract (or contracts) from the mark-to-market tax rules and further elect to have all positions in the straddle (including the IRC Section 1256 contracts) taxed under the rules that apply to “identified tax straddles” (see Q 7606).
(3) The owner may choose not to make either election described in (1) or (2), above, in which case the owner will be taxed as discussed in Q 7607.
A portion of any gain recognized upon disposition or other termination of a straddle that is part of a conversion transaction (see Q 7615) may be treated as ordinary income. A straddle will be subject to these rules if 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.3 See Q 7615 and Q 7616 for the definition and tax treatment of conversion transactions.
1. IRC § 1256(d); Temp. Treas. Reg. § 1.1092(b)-5T(e).
2. IRC § 1256(d). See General Explanation – TRA ’84, p. 317.