United States: IRS Issues Final Mixed Straddle Rules, Adopting Much Of Proposed Regulations

The IRS on July 18 issued final regulations (T.D. 9678) under Treas. Reg. Sec. 1.1092(b)-6, which provide how a taxpayer who establishes a "mixed straddle" accounts for unrealized gain or loss on a position.

A mixed straddle is defined as a straddle (which itself is defined in Section 1092(c)(1)) where all of the positions are held as capital assets, at least one (but not all) of the positions is a Section 1256 contract, a Section 1256(d) election has not been made, and the straddle isn't part of a larger straddle.

Special rules for the treatment of an "identified mixed straddle," as defined in Treas. Reg. Sec. 1.1092(b)-3T(a), are provided in Treas. Reg. Secs. 1.1092(b)-3T(b)(2) through (7).

Under the prior proposed and temporary regulations, Treas. Reg. Sec. 1.1092(b)-3T(b)(6) provided that if one or more positions of an identified mixed straddle were held by the taxpayer on the day prior to when the identified mixed straddle was established, the position or positions were to be marked-to-market as of the close of the last business day preceding the day the identified mixed straddle was established, subject to Treas. Reg. Secs. 1.1092(b)-1T and 1.1092(b)-2T (the wash sale rules and the loss deferral rule).

The final regulations modify the proposed and temporary regulations to provide that the rules of Treas. Reg. Sec. 1.1092(b)-3T(b)(6) apply only to identified mixed straddles established on or before Aug. 18, 2014, and that Treas. Reg. Sec. 1.1092(b)-6 applies to identified mixed straddles established after Aug. 18, 2014.

Under the final regulations, Treas. Reg. Sec. 1.1092(b)-6(a) provides that if one or more positions of an identified mixed straddle were held by the taxpayer on the day prior to when the identified mixed straddle was established, any unrealized gain or loss on the day prior to when the identified mixed straddle is established (i.e., the pre-straddle gain or loss) is taken into account at the time provided by the code that would apply to such gain or loss if the identified mixed straddle was not established and has the character as if the identified mixed straddle was not established.

In addition, Treas. Reg. Sec. 1.1092(b)-6(b) provides that the holding period for determining the long- or short-term character of a gain or loss that arises after a position became part of an identified mixed straddle begins the day after the identified mixed straddle ceases to exist.

The final regulations also clarify that pre- and post-straddle gain are considered when applying the rules relating to gains or losses of an identified mixed straddle under Section 1092(a) and Treas. Reg. Sec. 1.1092(b)-3T(b).

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