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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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30.9 Straddle Losses

Tax accounting rules generally match losses against unrealized gains in offsetting straddle positions. Straddle rules apply to commodities and to stock options used in straddle positions. Straddle positions include actively traded stock if at least one of the offsetting positions is: (1) a position on that stock or substantially similar or related property, or (2) the stock is in a corporation formed or used to take positions in personal property that offset positions taken by any shareholder. True hedging transactions are not subject to the straddle tax rules.

A call option is not treated as part of a straddle position if it is considered a qualified covered call option. A qualified covered call option is an option that a stockholder who is not a dealer grants on stock traded on a national securities exchange. Furthermore, the option must be granted more than 30 days before its expiration date and must not be “deep-in-the-money.” A “deep-in-the-money” option is an option with a strike or exercise price that is below the lowest qualified benchmark. The rules for determining these values are discussed in IRS Publication 550. A covered call option will not qualify if gain on the sale of the stock to be purchased by the option is reported in a year after the year in which the option is closed, and the stock is not held for 30 days or more after the date on which the option is closed. In such a case, the option is subject to the straddle loss deferral rules. The ...

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