For these purposes, a taxpayer will be considered to hold “offsetting positions with respect to personal property” if holding one of the positions substantially diminishes the taxpayer’s risk of loss from holding any other positions. There is no guidance in the context of the straddle rules as to the definition of “substantial diminution of risk of loss”. Taxpayers have taken various positions in this area, but there is nothing authoritative providing a safe harbor or other measuring stick to determine when the taxpayer is in danger of becoming subject to the straddle rules.
“Personal property” is any property of a kind that is actively traded. Stock is only included in the definition of personal property if the relevant offsetting position is an option with respect to that stock or substantially identical stock or a position with respect to “substantially similar or related property” other than stock.
If (1) an option and other positions held by the holder constitute positions in a straddle and (2) the holder disposed of less than all the offsetting positions, any loss from the disposition is deferred to the extent of unrecognized gain remaining at the close of the year in:
- a successor position;
- an offsetting position to the loss position; or
- and offsetting position to any successor position.
A “successor position” means a position that is or was at any time, offsetting to a second position where (1) the second position was offsetting to any loss position disposed of and (2) the new position is entered into during the period commencing 30 days before and ending 30 days after the disposition of the loss disposition. With regard to the holding period of straddle position, the general rule is that the holding period of any position that is part of a straddle does not begin earlier than the date the taxpayer no longer holds directly or indirectly (through a related person or a flow-through entity) an offsetting position with respect to that position. This rule does not apply to a position held by a taxpayer for the long-term holding period (or longer) before a straddle that included such a position is established.
Thus, if the option holder owns any offsetting positions with respect to an option, the holder’s holding period with respect to the option is “tolled”, until the time that she or he has disposed of the offsetting positions, and any gain recognized with respect to the option will be short-term capital gain income. If, however, the holder has held the offsetting positions for a long-term capital gain holding period prior to the establishment of the straddle, any losses that are recognized will be long-term capital losses. If a taxpayer hedges only a portion of her or his portfolio, absent identification of the positions as straddle positions, the IRS could find a straddle with any offsetting positions it chooses, and can even claim that one position offsets more than one other position.