Basically, a “successor position” is a new straddle position that is acquired within 30 days before, or 30 days after, the original position was disposed of at a loss and that replaces that original position in the straddle. More specifically, a “successor position” is a position (call it “P1”) that is offsetting to another position (“P2”) (or would have been offsetting to P2 had P2 been held at the time P1 was entered into) if (i) P2 was offsetting to the loss position disposed of, (ii) P1 is entered into during a period which begins 30 days before, and ends 30 days after, the disposition of the loss position, and (iii) P1 is entered into no later than 30 days after the loss position is no longer included in the straddle.2 (The effect of establishing a successor position to a loss position disposed of is analogous to the general wash sale rule explained in Q 7536.)
Any loss in excess of the amount allowed to be recognized under these rules (i.e., the amount of loss disallowed as a deduction) is carried forward and treated as if sustained in the succeeding tax year (in which it will again be subject to these deferral rules). A capital loss deferred under these rules will retain its character as a capital loss in the carryover year (even if loss with respect to a successor position would give rise to an ordinary loss).3 See Q 702 for the treatment of capital gains and losses.
Losses were denied to an investor who participated in a stock forwards program in which he incurred significant tax losses in one year while deferring the corresponding gain into future taxable years by holding instruments in the form of a purported “straddle.” The appeals court upheld the Tax Court ruling, stating that the purported “straddle” trades lacked economic substance and did not have any “practical economic effects other than the creation of income tax losses.” Accordingly, the losses were properly disallowed.4
1. IRC §§ 1092(a)(1), 1092(b)(1); Temp. Treas. Reg. § 1.1092(b)-1T(a).