7620 / Do the rules that govern constructive sales of appreciated financial positions apply to closed transactions?

(1) the transaction is closed before the end of the thirtieth day after the close of the taxable year (i.e., the “extended taxable year”);

(2) the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date the transaction is closed; and

(3) at no time during the 60-day period is the taxpayer’s risk of loss with respect to the position reduced by reason of holding an option to sell, an obligation to sell, or a short sale, being the grantor of a call option, or certain other transactions diminishing the risk of loss.¹

A closed transaction that is, in essence, reestablished (or replaced with a substantially similar transaction) before the 60-day period described above elapses, then closed again
within the extended taxable year, may also be disregarded. The Internal Revenue Code states that if:

(a) a transaction, which would otherwise be treated as a constructive sale of an appreciated financial position, is closed during the taxable year or during the 30 days thereafter (the extended taxable year), and

(b) another substantially similar transaction is entered into during the 60-day period beginning on the date that the original transaction is closed, that (i) also would otherwise be treated as a constructive sale of the position, and (ii) is closed before the end of the extended taxable year in which the original transaction occurs, and the transaction meets requirements (2) and (3), above,

then the substantially similar transaction will be disregarded for purposes of determining whether the original transaction met requirement (3) above (relating to the reduction of the taxpayer’s risk of loss during the 60-day period following the closed transaction).²

1. IRC §§ 1259(c)(3), 246(c)(4).