§1256 — Section 1256 contracts marked to market
36 cases·5 followed·10 distinguished·1 overruled·20 cited—14% support
Statute Text — 26 U.S.C. §1256
For purposes of this subtitle—
each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),
proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),
any gain or loss with respect to a section 1256 contract shall be treated as—
short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and
long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and
if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.
For purposes of this section, the term “section 1256 contract” means—
any regulated futures contract,
any foreign currency contract,
any nonequity option,
any dealer equity option, and
any dealer securities futures contract.
The term “section 1256 contract” shall not include—
any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or
any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.
The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.
If—
2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and
the taxpayer takes delivery under or exercises any of such contracts,
then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.
For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.
The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.
An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.
An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.
For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))—
at least 1 (but not all) of the positions of which are section 1256 contracts, and
with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.
Subsection (a) shall not apply in the case of a hedging transaction.
For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.
Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.
For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)).
For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 461(k)(4))—
for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,
for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,
if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,
if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or
if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes.
For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.
Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.
Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.
Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.
In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).
The term “hedging loss” means the excess of—
the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over
income received or accrued by the taxpayer during such taxable year from such transactions.
The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).
For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.
Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.
For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.
Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.
For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.
In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—
paragraph (3) of subsection (a) shall not apply to any such gain or loss, and
all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.
Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).
For purposes of this section—
The term “regulated futures contract” means a contract—
with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and
which is traded on or subject to the rules of a qualified board or exchange.
The term “foreign currency contract” means a contract—
which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts,
which is traded in the interbank market, and
which is entered into at arm’s length at a price determined by reference to the price in the interbank market.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.
The term “nonequity option” means any listed option which is not an equity option.
The term “dealer equity option” means, with respect to an options dealer, any listed option which—
is an equity option,
is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and
is listed on the qualified board or exchange on which such options dealer is registered.
The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.
The term “equity option” means any option—
to buy or sell stock, or
the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph).
The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).
The term “qualified board or exchange” means—
a national securities exchange which is registered with the Securities and Exchange Commission,
a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or
any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.
The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.
The term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which—
is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and
is traded on a qualified board or exchange.
For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.
The term “securities futures contract” has the meaning given to such term by section 1234B.
36 Citing Cases
§ 1256(f)(2) (providing that section 1256(a)(3), which provides that gain or loss with respect to a section 1256 contract shall be treated 40% as short-term capital gain or loss and 60% as long-term capital gain or loss, does not apply to “any gain or loss which, but for such paragraph, would be ordinary income or loss”).
Unlike the present case, however, Greene de lt with transfers of regulated futures contracts to a charity. Regulated futures contracts are sec. 1256 contracts.
- 8 - Petitioners do not attempt to factually distinguish the instant case from Summitt and Garcia. Rather, petitioners contend that Summitt and Garcia were wrongly decided. We disagree . Following Summitt and Garcia, we hold that Cyber Advice's major foreign currency option was not a "foreign currency contract" as defined in section 1256(g) (2).
Petitioner argues that his regular trading activity in prior years (which involved petitioner’s personally making trades on the floor of the CBOT) is distinguishable from the trades in 1994 which petitioner, because of the CFTC investigation, conducted through a floor broker.
As we shall see, section 1256 applies to futures and options contracts that are traded on a qualified exchange .
--- MAJORITY --- OPINION Haines, Judge: This case is before the Court on respondent’s motion for partial summary judgment pursuant to Rule 121. Respondent raises two issues for decision in his motion: (1) Whether under the marked-to-market rules of section 1256 J. Summitt, Inc. (Summitt), an S corporation, recognized loss upon its assignment to charity of a major foreign currency call option, and (2) whether Summitt was required to include in its income, upon its assignment to charity of a minor
Section 1402(i)(l) specifically states that in determining the net earnings from self-employment of any options dealer or commodities dealer, there shall not be excluded any gain or loss (in the normal course of the taxpayer’s activity of dealing in or trading section 1256 contracts) from section 1256 contracts or property related to such contracts.
The Claimed 1988 NOL Deduction Section 1256 During 1986, Mr.
s and Exchange Commission; (2) a domestic board of trade designated as a contract market by the - 8 - CFTC; or (3) "any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes" of section 1256. The purpose of section 1256 is to provide the system of taxation based on marking to market of regulated futures contracts. Requiring compliance with it to qualify for the 6-month holding period of section 1222 would t result in domestic
- 33 - [*33] That puts the contracts in section 1256 territory.
ERTA Sections 508 and 509 Section 1256 was enacted by ERTA sections 508 and 509, 95 Stat.
ERTA Sections 508 and 509 Section 1256 was enacted by ERTA sections 508 and 509, 95 Stat.
ERTA Sections 508 and 509 Section 1256 was enacted by ERTA sections 508 and 509, 95 Stat.
See generally Taxpayer Relief Act of 1997, Pub.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
The upper tier partnership realized a loss on the sale, but the loss deduction was disallowed because the POPS investor was a majority owner ofthe 5Under Bricolage's reading ofthe section 1256 straddle rules, the partner- ship would realize a loss on the sister option ifand only ifit took delivery ofthe underlying foreign currency.
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of-- (1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands ofthe taxpayer, or - 9 - (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands ofthe taxpayer, shall be treated as gain
- 33 - [*33] That puts the contracts in section 1256 territory.
- 14 - (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands ofthe taxpayer, shall be treated as gain or loss from the sale ofa capital asset.
iration, or other termination of— (1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, shall be treated as gain or loss from the sale of a capital asset.
He also reported on Form 6781, Gains and Losses from Section 1256 Contracts and Straddles, losses from futures transactions as a loss from section 12562 contracts marked to market .