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MrSmackDaddy,

Greetings and welcome to the Motley Fool message boards.

If I hold a straddle for less than a calendar tax year do I still have to file as if I had a contructive sale?

A straddle is different than a constructive sale. A combination of positions may be a straddle without a constructive sale, it may be a constructive sale without a straddle, or it may incorporate both a straddle and a constructive sale. The IRS indicates Form 6781 should be used to report a straddle regardelss of the existance of a constructive sale.

If I enter both sides of a straddle in Feb and then exit both sides of the straddle in Mar doesn't everything wash out at the end of the year to be the same tax wise whether you consider the straddle a constructive sale or not?

Your tax liability may or may not be the same at the end of the year. One reason it might be different is the requirement that interest expenses from a straddle be reported a capital losses instead of itemized deductions. See Section 263(g).

http://www.fourmilab.ch/ustax/www/t26-A-1-B-IX-263.html#(g)

Isn't this rule around to make sure that you don't avoid taxation in any tax year buy entering a straddle to lock in your gain and increase your holding period, thereby avoiding taxes until some tax year in the future?

In the list of reasons for both the straddle rules and the constructive sales rules that's certainly a biggy, but it is not the only reason.

For what it's worth, my policy is to report every straddle on Form 6781, regardless of any tax impact (or the lack thereof). Keep in mind, however, that I am only another options trader who has to figure out what to do, not a tax professional.

Good Luck,
Z
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