Holding Period and
Loss Treatment Rules
The holding period of a position in a straddle generally begins no
earlier than the date on which the straddle ends (the date you no longer hold an
offsetting position). This rule does not apply to any position you held more than 1 year
before you established the straddle. But see Exceptions, later.
Example. On March 6, 2001, you acquired gold. On January 4,
2002, you entered into an offsetting short gold forward contract (nonregulated futures
contract). On April 1, 2002, you disposed of the short gold forward contract at no gain or
loss. On April 8, 2002, you sold the gold at a gain. Because the gold had been held for 1
year or less before the offsetting short position was entered into, the holding period for
the gold begins on April 1, 2002, the date the straddle ended. Gain recognized on the sale
of the gold will be treated as short-term capital gain.
Loss treatment. Treat the loss on the sale of one or more positions
(the loss position) of a straddle as a long-term capital loss if both of the following are
true.
- You held (directly or indirectly) one or more offsetting positions to the loss position
on the date you entered into the loss position.
- You would have treated all gain or loss on one or more of the straddle positions as
long-term capital gain or loss if you had sold these positions on the day you entered into
the loss position.
Mixed straddles. Special
rules apply to a loss position that is part of a mixed straddle and that is a non-section
1256 position. A mixed straddle is a straddle:
- That is not part of a larger straddle,
- In which all positions are held as capital assets,
- In which at least one (but not all) of the positions is a section 1256 contract, and
- For which the mixed straddle election (Election A, discussed later) has not been made.
Treat the loss as 60% long-term capital loss and 40% short-term capital loss, if all of
the following conditions apply.
- Gain or loss from the sale of one or more of the straddle positions that are section
1256 contracts would be considered gain or loss from the sale or exchange of a capital
asset.
- The sale of no position in the straddle, other than a section 1256 contract, would
result in a long-term capital gain or loss.
- You have not made a straddle-by-straddle identification election (Election B) or mixed
straddle account election (Election C), both discussed later.
Example. On March 1, 2002, you entered into a long gold forward
contract. On July 15, 2002, you entered into an offsetting short gold regulated futures
contract. You did not make an election to offset gains and losses from positions in a
mixed straddle. On August 9, 2002, you disposed of the long forward contract at a loss.
Because the gold forward contract was part of a mixed straddle and the disposition of this
non-section 1256 position would not result in long-term capital loss, the loss recognized
on the termination of the gold forward contract will be treated as a 60% long-term and 40%
short-term capital loss.
Exceptions. The special holding period and loss treatment for
straddle positions does not apply to positions that:
- Constitute part of a hedging transaction,
- Are included in a straddle consisting only of section 1256 contracts, or
- Are included in a mixed straddle account (Election C), discussed later.
Mixed Straddles
If you disposed of a position in a mixed straddle and make one of the
elections described in the following discussions, report your gain or loss as
indicated in those discussions. If you do not make any of the elections, report your gain
or loss in Part II of Form 6781. If you disposed of the section 1256 component of the
straddle, enter the recognized loss (line 10, column (h)) or your gain (line 12, column
(f)) in Part I of Form 6781, on line 1. Do not include it on line 11 or 13 (Part II).
Mixed straddle election (Election A). You can elect out of the
marked to market rules, discussed under Section 1256 Contracts Marked to Market, earlier,
for all section 1256 contracts that are part of a mixed straddle. Instead, the gain and
loss rules for straddles will apply to these contracts. However, if you make this election
for an option on a section 1256 contract, the gain or loss treatment discussed earlier
under Options will apply, subject to the gain and loss rules for straddles.
You can make this election if:
- At least one (but not all) of the positions is a section 1256 contract, and
- Each position forming part of the straddle is clearly identified as being part of that
straddle on the day the first section 1256 contract forming part of the straddle is
acquired.
If you make this election, it will apply for all later years as well. It cannot be
revoked without the consent of the IRS. If you made this election, check box A of Form
6781. Do not report the section 1256 component in Part I.
Other elections. You can avoid the 60% long-term capital loss
treatment required for a non-section 1256 loss position that is part of a mixed straddle,
described earlier, if you choose either of the two following elections to offset gains and
losses for these positions.
- Election B. Make a separate identification of the positions of each
mixed straddle for which you are electing this treatment (the straddle-by-straddle
identification method).
- Election C. Establish a mixed straddle account for a class of activities
for which gains and losses will be recognized and offset on a periodic basis.
These two elections are alternatives to the mixed straddle election. You can choose
only one of the three elections. Use Form 6781 to indicate your election choice by
checking box A, B, or C, whichever applies.
Straddle-by-straddle identification election (Election B).
Under this election, you must clearly identify each position that is part of the
identified mixed straddle by the earlier of:
- The close of the day the identified mixed straddle is established, or
- The time the position is disposed of.
If you dispose of a position in the mixed straddle before the end of the day on which
the straddle is established, this identification must be made by the time you dispose of
the position. You are presumed to have properly identified a mixed straddle if independent
verification is used.
The basic tax treatment of gain or loss under this election depends on which side of
the straddle produced the total net gain or loss. If the net gain or loss from the
straddle is due to the section 1256 contracts, gain or loss is treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Enter the net gain or loss
in Part I of Form 6781 and identify the election by checking box B.
If the net gain or loss is due to the non-section 1256 positions, gain or loss is
short-term capital gain or loss. Enter the net gain or loss on Part I of Schedule D and
identify the election.
For the specific application of the rules of this election, see regulations section
1.1092(b)-3T.
Example. On April 1, you entered into a non-section 1256
position and an offsetting section 1256 contract. You also made a valid election to treat
this straddle as an identified mixed straddle. On April 8, you disposed of the non-section
1256 position at a $600 loss and the section 1256 contract at an $800 gain. Under these
circumstances, the $600 loss on the non-section 1256 position will be offset against the
$800 gain on the section 1256 contract. The net gain of $200 from the straddle will be
treated as 60% long-term capital gain and 40% short-term capital gain because it is due to
the section 1256 contract.
Mixed straddle account (Election C). You may elect to
establish one or more accounts for determining gains and losses from all positions in a
mixed straddle. You must establish a separate mixed straddle account for each separate
designated class of activities.
Generally, you must determine gain or loss for each position in a mixed straddle
account as of the close of each business day of the tax year. You offset the net section
1256 contracts against the net non-section 1256 positions to determine the daily
account net gain or loss.
If the daily account amount is due to non-section 1256 positions, the amount is treated
as short-term capital gain or loss. If the daily account amount is due to section 1256
contracts, the amount is treated as 60% long-term and 40% short-term capital gain or loss.
On the last business day of the tax year, you determine the annual account net gain
or loss for each account by netting the daily account amounts for that account for
the tax year. The total annual account net gain or loss is determined by netting
the annual account amounts for all mixed straddle accounts that you had established.
The net amounts keep their long-term or short-term classification. However, no more
than 50% of the total annual account net gain for the tax year can be treated as long-term
capital gain. Any remaining gain is treated as short-term capital gain. Also, no more than
40% of the total annual account net loss can be treated as short-term capital loss. Any
remaining loss is treated as long-term capital loss.
The election to establish one or more mixed straddle accounts for each tax year must be
made by the due date (without extensions) of your income tax return for the immediately
preceding tax year. If you begin trading in a new class of activities during a tax year,
you must make the election for the new class of activities by the later of either:
- The due date of your return for the immediately preceding tax year (without extensions),
or
- 60 days after you entered into the first mixed straddle in the new class of activities.
You make the election on Form 6781 by checking box C. Attach Form 6781 to your income
tax return for the immediately preceding tax year, or file it within 60 days, if that
applies. Report the annual account net gain or loss from a mixed straddle account in Part
II of Form 6781. In addition, you must attach a statement to Form 6781 specifically
designating the class of activities for which a mixed straddle account is established.
For the specific application of the rules of this election, see regulations section
1.1092(b)-4T.
Interest expense and carrying charges relating to mixed straddle account
positions. You cannot deduct
interest and carrying charges that are allocable to any positions held in a mixed straddle
account. Treat these charges as an adjustment to the annual account net gain or
loss and allocate them proportionately between the net short-term and the net long-term
capital gains or losses.
To find the amount of interest and carrying charges that is not deductible and that
must be added to the annual account net gain or loss, apply the rules described in chapter
3 under Interest expense and carrying charges on straddles to the positions held
in the mixed straddle account.
Sales of Stock to ESOPs
or Certain Cooperatives
If you sold qualified securities held for at least 3 years to an
employee stock ownership plan (ESOP) or eligible worker-owned cooperative, you may
be able to elect to postpone all or part of the gain on the sale if you bought qualified
replacement property (certain securities) within the period that began 3 months before the
sale and ended 12 months after the sale. If you make the election, you must recognize gain
on the sale only to the extent the proceeds from the sale exceed the cost of the qualified
replacement property.
You must reduce the basis of the replacement property by any postponed gain. If you
dispose of any replacement property, you may have to recognize all of the postponed gain.
Generally, to qualify for the election the ESOP or cooperative must own at least 30% of
the outstanding stock of the corporation that issued the qualified securities. Also, the
qualified replacement property must have been issued by a domestic operating corporation.
How to make the election. You must make the election no later than
the due date (including extensions) for filing your tax return for the year in which you
sold the stock. If your original return was filed on time, you may make the election on an
amended return filed no later than 6 months after the due date of your return (excluding
extensions). Write Filed pursuant to section 301.9100-2 at the top of the amended
return, and file it at the same address you used for your original return.
How to report and postpone gain. Report the entire gain
realized on line 8 of Schedule D. To make the choice to postpone gain, enter Section
1042 election in column (a) of the line directly below the line on which you reported
the gain. Enter in column (f) the amount of the gain you are postponing or expecting to
postpone. Enter it as a loss (in parentheses). If the actual postponed gain is different
from the amount you report, file an amended return.
Also attach the following statements.
- A statement of election that indicates you are making an election under section
1042(a) of the Internal Revenue Code and that includes the following information.
- A description of the securities sold, the date of the sale, the amount realized on the
sale, and the adjusted basis of the securities.
- The name of the ESOP or cooperative to which the qualified securities were sold.
- For a sale that was part of a single, interrelated transaction under a prearranged
agreement between taxpayers involving other sales of qualified securities, the names and
identifying numbers of the other taxpayers under the agreement and the number of shares
sold by the other taxpayers.
- A notarized statement of purchase describing the qualified replacement
property, date of purchase, and the cost of the property and declaring the property to be
qualified replacement property for the qualified stock you sold. The statement must have
been notarized no later than 30 days after the purchase. If you have not yet purchased the
qualified replacement property, you must attach the notarized statement of purchase
to your income tax return for the year following the election year (or the election will
not be valid).
- A verified written statement of the domestic corporation whose employees are covered by
the ESOP acquiring the securities, or of any authorized officer of the cooperative,
consenting to the taxes under sections 4978 and 4979A of the Internal Revenue Code on
certain dispositions, and prohibited allocations of the stock purchased by the ESOP or
cooperative.
More information. For details, see section 1042 of the Internal
Revenue Code and Temporary Regulations section 1.1042-1T.
Rollover of Gain
From Publicly
Traded Securities
You may qualify for a tax-free rollover of certain gains from the
sale of publicly traded securities. This means that if you buy certain replacement
property and make the choice described in this section, you postpone part or all of your
gain.
You postpone the gain by adjusting the basis of the replacement property as described
in Basis of replacement property, later. This postpones your gain until the year
you dispose of the replacement property.
You qualify to make this choice if you meet all the following tests.
- You sell publicly traded securities at a gain. Publicly traded securities are securities
traded on an established securities market.
- Your gain from the sale is a capital gain.
- During the 60-day period beginning on the date of the sale, you buy replacement
property. This replacement property must be either common stock or a partnership interest
in a specialized small business investment company (SSBIC). This is any
partnership or corporation licensed by the Small Business Administration under section
301(d) of the Small Business Investment Act of 1958, as in effect on May 13, 1993.
Amount of gain recognized. If
you make the choice described in this section, you must recognize gain only up to the
following amount:
- The amount realized on the sale, minus
- The cost of any common stock or partnership interest in an SSBIC that you bought during
the 60-day period beginning on the date of sale (and did not previously take into account
on an earlier sale of publicly traded securities).
If this amount is less than the amount of your gain, you can postpone the rest of your
gain, subject to the limit described next. If this amount is equal to or more than the
amount of your gain, you must recognize the full amount of your gain.
Limit on gain postponed. The amount of gain you can
postpone each year is limited to the smaller of:
- $50,000 ($25,000 if you are married and file a separate return), or
- $500,000 ($250,000 if you are married and file a separate return), minus the amount of
gain you postponed for all earlier years.
Basis of replacement property. You must subtract the amount of
postponed gain from the basis of your replacement property.
How to report and postpone gain. Report the entire gain realized from the sale on line 1 or line 8 of Schedule
D (Form 1040), whichever is appropriate. To make the choice to postpone gain, enter
SSBIC Rollover in column (a) of the line directly below the line on which you
reported the gain. Enter the amount of gain postponed in column (f). Enter it as a loss
(in parentheses).
Also, attach a schedule showing how you figured the postponed gain, the name of the
SSBIC in which you purchased common stock or a partnership interest, the date of that
purchase, and your new basis in that SSBIC stock or partnership interest.
You must make the choice to postpone gain no later than the due date (including
extensions) for filing your tax return for the year in which you sold the securities. If
your original return was filed on time, you may make the choice on an amended return filed
no later than 6 months after the due date of your return (excluding extensions). Write Filed
pursuant to section 301.9100-2 at the top of the amended return, and file it at the
same address you used for your original return.
Your choice is revocable with the consent of the IRS.
Gains on Qualified
Small Business Stock
This section discusses two provisions of the law that may apply to
gain from the sale or trade of qualified small business stock. You may qualify for
a tax-free rollover of all or part of the gain. You may be able to exclude
part of the gain from your income.
Qualified small business stock. This is stock that meets all the
following tests.
- It must be stock in a C corporation.
- It must have been originally issued after August 10, 1993.
- The corporation must have total gross assets of $50 million or less at all times after
August 9, 1993, and before it issued the stock. Its total gross assets immediately after
it issued the stock must also be $50 million or less.
When figuring the corporation's
total gross assets, you must also count the assets of any predecessor of the corporation.
In addition, you must treat all corporations that are members of the same
parent-subsidiary controlled group as one corporation.
- You must have acquired the stock at its original issue, directly or through an
underwriter, in exchange for money or other property (not including stock), or as pay for
services provided to the corporation (other than services performed as an underwriter of
the stock). In certain cases, your stock may also meet this test if you acquired it from
another person who met this test, or through a conversion or trade of qualified small
business stock that you held.
- The corporation must have met the active business test, defined next,
and must have been a C corporation during substantially all the time you held the stock.
- Within the period beginning 2 years before and ending 2 years after the stock was
issued, the corporation cannot have bought more than a de minimis amount of its stock from
you or a related party.
- Within the period beginning 1 year before and ending 1 year after the stock was issued,
the corporation cannot have bought more than a de minimis amount of its stock from anyone,
unless the total value of the stock it bought is 5% or less of the total value of all its
stock.
For more information about tests 6 and 7, see the regulations under section 1202 of the
Internal Revenue Code.
Active business test. A corporation meets this test for any period
of time if, during that period, both the following are true.
- It was an eligible corporation, defined below.
- It used at least 80% (by value) of its assets in the active conduct of at least one qualified
trade or business, defined below.
Exception for SSBIC. Any specialized small business
investment company (SSBIC) is treated as meeting the active business test. An SSBIC is an
eligible corporation that is licensed to operate under section 301(d) of the Small
Business Investment Act of 1958 as in effect on May 13, 1993.
Eligible corporation. This is any U.S. corporation other
than:
- A Domestic International Sales Corporation (DISC) or a former DISC,
- A corporation that has made, or whose subsidiary has made, an election under section 936
of the Internal Revenue Code, concerning the Puerto Rico and possession tax credit,
- A regulated investment company,
- A real estate investment trust (REIT),
- A real estate mortgage investment conduit (REMIC),
- A financial asset securitization investment trust (FASIT), or
- A cooperative.
Qualified trade or business. This is any trade or business
other than:
- One involving services performed in the fields of health, law, engineering,
architecture, accounting, actuarial science, performing arts, consulting, athletics,
financial services, or brokerage services,
- One whose principal asset is the reputation or skill of one or more employees,
- Any banking, insurance, financing, leasing, investing, or similar business,
- Any farming business (including the business of raising or harvesting trees),
- Any business involving the production or extraction of products for which percentage
depletion can be claimed, or
- Any business of operating a hotel, motel, restaurant, or similar business.
Rollover of Gain
You may qualify for a tax-free rollover of capital gain from the sale of qualified
small business stock held more than 6 months. This means that, if you buy certain
replacement stock and make the choice described in this section, you postpone part or all
of your gain.
You postpone the gain by adjusting the basis of the replacement stock as described in Basis
of replacement stock, below. This postpones your gain until the year you dispose of
the replacement stock.
You can make this choice if you meet all the following tests.
- You buy replacement stock during the 60-day period beginning on the date of the sale.
- The replacement stock is qualified small business stock.
- The replacement stock continues to meet the active business requirement for small
business stock for at least the first 6 months after you buy it.
Amount of gain recognized. If you make the choice described in this
section, you must recognize the capital gain only up to the following amount:
- The amount realized on the sale, minus
- The cost of any qualified small business stock you bought during the 60-day period
beginning on the date of sale (and did not previously take into account on an earlier sale
of qualified small business stock).
If this amount is less than the amount of your capital gain, you can postpone the rest
of that gain. If this amount equals or is more than the amount of your capital gain, you
must recognize the full amount of your gain.
Basis of replacement stock. You must subtract the amount of
postponed gain from the basis of your replacement stock.
Holding period of replacement stock. Your holding period for the
replacement stock includes your holding period for the stock sold, except for the purpose
of applying the 6-month holding period requirement for choosing to roll over the gain on
its sale.
Pass-through entity. A pass-through entity (a partnership, S
corporation, or mutual fund or other regulated investment company) also may make the
choice to postpone gain. The benefit of the postponed gain applies to your share of the
entity's postponed gain if you held an interest in the entity for the entire period the
entity held the stock.
If a pass-through entity sold qualified small business stock held for more than 6
months and you held an interest in the entity for the entire period the entity held the
stock, you also may choose to postpone gain if you, rather than the pass-through entity,
buy the replacement stock within the 60-day period.
How to report gain. Report the
entire gain realized from the sale on line 1 or line 8 of Schedule D (Form 1040),
whichever is appropriate. To make the choice to postpone the gain, enter Section
1045 Rollover in column (a) of the line directly below the line on which you reported
the gain. Enter the amount of gain postponed in column (f). Enter it as a loss (in
parentheses).
You must make the choice to postpone gain no later than the due date (including
extensions) for filing your tax return for the year in which you sold the stock. If your
original return was filed on time, you may make the choice on an amended return filed no
later than 6 months after the due date of your return (excluding extensions). Write Filed
pursuant to section 301.9100-2 at the top of the amended return, and file it at the
same address you used for your original return.
Section 1202 Exclusion
You generally can exclude from your income one-half of your gain from
the sale or trade of qualified small business stock held by you for more than 5
years. The taxable part of your gain equal to your section 1202 exclusion is a 28% rate
gain. See Capital Gain Tax Rates, later.
SSBIC stock. If the stock is specialized small business investment
company (SSBIC) stock that you bought as replacement property for publicly traded
securities you sold at a gain, you must reduce the basis of the stock by the amount of any
postponed gain on that earlier sale, as explained earlier under Rollover of Gain From
Publicly Traded Securities. But do not reduce your basis by that amount when figuring
your section 1202 exclusion.
Limit on eligible gain. The amount of your gain from the stock of
any one issuer that is eligible for the exclusion in 2002 is limited to the greater of:
- Ten times your basis in all qualified stock of the issuer that you sold or exchanged
during the year, or
- $10 million ($5 million for married individuals filing separately) minus the amount of
gain from the stock of the same issuer that you used to figure your exclusion in earlier
years.
How to report gain. Report the entire gain realized from the sale in
column (f) of line 8 of Schedule D (Form 1040). Report an amount equal to the excluded
gain in column (g). Directly below the line on which you report the gain, enter Section
1202 exclusion in column (a) and enter the amount of the exclusion in column (f).
Enter it as a loss (in parentheses).
More information. For information about additional requirements that
may apply, see section 1202 of the Internal Revenue Code.
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