Contructive Sale Tax Rule? If I open a long and short position at the same price, what are the conseqences???

Question

I'm new to investing and opened up a long position and a short position at the same price of 54 per share. 300 shares both ways. Knowing that most likely the stock was going to drop I would eventually get it at a lower price if this happens because every dollar loss in the long position is a gain in the short position making it even out. It has gotten down to 45 and I want to buy to cover and close out the short position, since I think this is a bottom. My hope was to gain when the stock goes back up, but I was unaware of this contructive tax rule I have been reading up on the IRS website http://www.irs.gov/publications/p550/ch04.html#d0e8897 it is very confusing and if someone can help clarify my position or give advice on what to do it would be greatly appreciated. Because it seems like if I do the wrong thing the tax consequences could be killer. Thanks!

Answer 1

My understanding is:

(1) You do not have a constructive sale because one position had not appreciated before you opened the other.

(2) Assuming you opened the positions after October 22, 2004, you do have a "straddle" and the "straddle rules" apply. (See page 57 of

http://www.irs.gov/pub/irs-pdf/p550.pdf )

(3) If you close the short position you will realize a profit. That profit will be a taxable capital gain.

(4) If you close the long position you will realize a loss, but that loss cannot be claimed on your taxes as long as it is offset by an unrealized gain in the short position.

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Warning! I am not a tax professional. I did spend a long time learning about taxes and straddles some years ago, but the rules have changes since then.

I suggest you repeat your question on the message board at

http://www.fairmark.com/

which has some tax professionals posting.