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Webinar on Tax Straddles Addresses Offsetting Positions and IRC Compliance
Thursday, February 5, 2015
We continue to keep the topic of tax straddles alive and well. Yesterday, we shared our knowledge about this Section of the IRC (1092) and hosted Tax Implications of Straddles, our fourth taxable events webinar. Thank you to our attendees -- tax managers, compliance officers, tax analysts, controllers, chief financial officers and accountants from hedge funds, hedge fund service providers and accounting & audit firms -- for participating in this event. The webinar took a deeper dive into basic, mixed & identified straddles as well as Qualified Covered Calls (QCC), the exception to the straddles rule.
George Michaels, an authority on tax analysis / accounting of securities transactions (TAST), led this talk about the tax straddle rule, which was created to prevent taxpayers from using offsetting positions to negate each other's economic risk and deliberately create taxable losses without corresponding economic losses. After talking about the history of this rule, Michaels explained key concepts behind it, provided examples of trades that result in straddles, and discussed how covered calls can be exempt from straddles calculations. Last but not least, with the help of Daniel Tilkin, fellow TAST expert and G2’s Software Engineering Team Lead & Senior Tax Analyst, Michaels fielded participant questions.
Michaels began the crux of the webinar by talking about loss deferral, how and when to make holding period adjustments and successor positions (a new position that replaces a disposed straddle leg) -- all concepts integral to basic straddles. When talking about identified straddles, where losses are disallowed, Michaels emphasized that taxpayers must identify this kind of straddle on the day the offsetting position is executed. Otherwise, the straddle is subject to basic straddle rules and cost bases adjustments, which can potentially benefit the taxpayer, will not be allowed.
Every rule has its exception and Section 1092 is well…no exception. Michaels discussed how to identify covered calls, a legitimate economic strategy for enhancing income on equities that, because of their nature, can get ensnarled in the straddles rule. Mixed straddles and their relationship to 1256 contracts was touched upon as well.
At the close of the presentation, attendees asked questions, including: Can the gains and losses of foreign currency fluctuations cause straddles? And when you have a situation where the wash sale rules, straddles rule and constructive sale rules all apply, which rules take priority? Tilkin and Michaels addressed these questions and referred attendees to our white paper, Tax Implications of Straddles as another resource on section 1092.
We created this presentation because we felt this topic was worthy of a webinar for two main reasons. First, the straddles rule can be quite complex. There are several different kinds of straddles -- basic, basic mixed, identified and mixed identified. In addition, this section of the tax code interacts with other sections of the tax code, including wash sales (1091) and constructive sales (1259). For example, a non-wash sale can become a wash sale because of the effects of an identified straddle. All of this makes IRC compliance difficult. Second, although most straddles are constructed using options, a hedge that does not employ options usually causes a straddle. This is important to note because funds that do not use options may think they can ignore the straddles rule, but this is not always the case. For instance, the following strategies can result in a straddle: short vs. the box invariably results in straddles as does using swaps to box off equity positions.
A comprehensive presentation on the straddles rule is just not possible in one, two or even three webinars. We tried to limit our scope and hope our attendees found this webinar informative. You can view a recording of the webinar by visiting our Youtube channel. You can also access the video recording and a pdf of the slide presentation by visiting our website. To learn more about our Taxable Events webinars, visit our webinar section. For additional TAST resources, visit our Resource page. Our next webinar will be held in the spring. Stay tuned for more information on which taxable events we will explore.