7587 / How are securities futures contracts taxed?

Holding period. If property is delivered in satisfaction of a securities futures contract to acquire property, the holding period for the property will include the period the taxpayer held the contract, provided that the contract was a capital asset in the hands of the taxpayer.⁴

Short sale treatment. In applying the short sale rules (see Q 7524 to Q 7535), a securities futures contract to acquire property will be treated in a manner similar to the property itself.⁵ Thus, for example, the holding of a securities futures contract to acquire property and the short sale of property which is substantially identical to the property under the contract will result in the application of the rules under IRC Section 1233(b) (regarding short-term gains and holding periods). (Because securities futures contracts are not treated as commodity futures contracts under IRC Section 1234B(d), the rule providing that commodity futures are not substantially identical if they call for delivery in different months does not apply.) In addition, a securities futures contract to sell property is treated as a short sale, and the settlement of the contract is treated as the closing of the short sale.⁶

Except as otherwise provided in the straddle regulations under IRC Section 1092(b) – which treats certain losses from a straddle as long-term capital losses (see Q 7599) – or in IRC Section 1233 (gains and losses from short sales, special holding period rules), capital gain or loss from the sale, exchange, or termination of a securities futures contract to sell property (i.e., the short side of a futures contract) will be short-term capital gain or loss.⁷

Wash sale treatment. A 2002 Joint Committee report explained that “[t]he wash sale rules apply to any loss from the sale, exchange, or termination of a securities futures contract (other than a dealer securities futures contract) if, within a period beginning 30 days before the date of such sale, exchange, or termination and ending 30 days after such date: (1) stock that is substantially identical to the stock to which the contract relates is sold; (2) a short sale of substantially identical stock is entered into; or (3) another securities futures contract to sell substantially identical stock is entered into.”⁸

Straddle treatment. Stock that is part of a straddle, at least one of the offsetting positions of which is a securities futures contract with respect to the stock or substantially identical stock, will be subject to the straddle rules (see Q 7593 to Q 7614).⁹ The regulations under IRC Section 1092(b), which apply the principles of IRC Sections 1233(b) and 1233(d) (regarding the determination of short-term and long-term losses), to positions in a straddle will also apply.¹⁰ See Q 7599 for the treatment of a tax straddle. These rules are demonstrated in the following example from H.R. Conf. Rep. No. 106-1033 (CRTRA 2000):

Example: Assume a taxpayer holds a long-term position in actively traded stock (which is a capital asset in the taxpayer’s hands) and enters into a securities futures contract to sell substantially identical stock
(at a time when the position in the stock has not appreciated in value so that the constructive sale rules of IRC Section 1259 do not apply). The taxpayer has a straddle. Any loss on closing the securities futures contract will be a long-term capital loss.

Constructive sale of an appreciated financial position. As indicated in the example, above, if a taxpayer holds a long-term position in actively traded stock (which is a capital asset in the taxpayer’s hands) and enters into a securities futures contract to sell substantially identical stock at a time when the position in the stock has appreciated in value, the constructive sale rules apparently will apply (see Q 7617 to Q 7621).¹¹

Mark-to-market treatment not applicable. Securities futures contracts (or options on such contracts) generally are not treated as IRC Section 1256 contracts. (An exception to the general rule exists for dealer securities futures contracts.)¹² Thus, holders of these contracts are not subject to the mark-to-market rules of IRC Section 1256 (see Q 7592). Consequently, gains and losses from securities futures contracts are not eligible for 60 percent long-term capital gain and 40 percent short-term capital gain treatment.¹³ Although a narrow-based security index is not subject to mark-to-market treatment, a broad-based security index remains subject to such tax treatment.¹⁴