7611 / How are gains and losses that are part of a mixed straddle for which a straddle-by-straddle identification election has been made treated if all IRC Section 1256 positions are disposed of on the same day?

If all of the IRC Section 1256 contract positions in the mixed straddle are disposed of (or deemed disposed of) on the same day, gains and losses realized on the IRC Section 1256 positions are netted. Also, realized and unrealized gains and losses with respect to non-IRC Section 1256 positions of the straddle are netted on that day. Net gain or loss realized from the IRC Section 1256 positions is then treated as short-term capital gain or loss to the extent of the net gain or loss on the non-IRC Section 1256 positions on the day. Net gain or loss with respect to the IRC Section 1256 positions that exceeds the net gain or loss on the non-IRC Section 1256 positions is treated as 60 percent long-term and 40 percent short-term.¹

Example. On December 30, Joshua enters into an IRC Section 1256 contract and an offsetting non-IRC Section 1256 position and makes a valid election to use the straddle-by-straddle identification rules. On December 31, Joshua disposes of the IRC Section 1256 contract at a gain of $1,500. As of December 31, there is $1,000 of unrealized loss in the non-IRC Section 1256 position. Under these circumstances, $1,000 of the gain realized on the IRC Section 1256 contract is short-term capital gain (i.e., to the extent of the unrealized loss on the non-IRC Section 1256 position). The other $500 of gain from the straddle is treated as 60 percent long-term capital gain ($300) and 40 percent short-term capital gain ($200).

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1. Temp. Treas. Reg. § 1.1092(b)-3T(b)(4).