7614 / What is an “identified straddle”? How is it taxed?

An “identified straddle” is a straddle in which (1) all the original positions are acquired on the same day; (2) all positions are clearly identified in the investor’s records as being part of an identified straddle before the close of that day (or other time prescribed by future regulations), including which positions are offsetting with respect to other positions in the straddle; (3) no position is part of a larger straddle; and (4) all positions remain open at the close of the year, or were closed out on the same day during the year.¹ Apparently, if a successor or substitute position replaces an original position of the straddle, the straddle ceases to be an identified straddle.²

In the case of an identified straddle, the loss deferral and wash sale rules discussed in
Q 7599 do not apply. Instead, any loss realized with respect to a position in an identified straddle is treated as sustained no earlier than the day on which all positions making up the straddle are disposed of.³

The tax straddle short sale rules discussed in Q 7599 apply to identified straddles.⁴

While the IRC does not plainly set forth the application of the constructive sales rules of IRC Section 1259 to identified straddles, Congress’ intent is, apparently, that a straddle designated as an identified tax straddle under IRC Section 1092(a)(2) will be treated as a constructive sale of an appreciated financial position under IRC Section 1259. This generally results in immediate gain recognition, the start of a new holding period, and an adjustment to basis (unless certain requirements are met for closing out the position constituting the constructive sale)⁵ (see Q 7617 to Q 7621).