Final regulations - Accounting for unrealized gain, loss on position held before establishing a “mixed straddle” using straddle-by-straddle identification  

July 17:  The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9678) that provide guidance for taxpayers electing to establish a “mixed straddle” using straddle-by-straddle identification (an “identified mixed straddle”).

Today’s final regulations [PDF 207 KB] finalized regulations that were proposed in August 2013 (and remove corresponding temporary regulations) and reflect a change made in response to comments concerning the effective date. Today’s release delays application of the final regulations to identified mixed straddles established 30 days after July 18, 2014 (which is the scheduled date of publication of the final regulations in the Federal Register).

The final regulations also incorporate changes in response to comments seeking clarification regarding the holding period for the unrealized gain or loss, and whether the unrealized gain is taken into account in determined the loss deferral rules of section 1092(a).

The final regulations not reflect changes in response to comments in two other areas:

  • The character mismatch and timing of gain or loss recognition for assets held by insurance companies
  • Certain technical rules in existing regulations relating to identified mixed straddles


The August 2013 temporary regulations provided that unrealized gain or loss on a position held by a taxpayer prior to the time the taxpayer establishes an identified mixed straddle will be taken into account at the time and will have the character that would apply if the identified mixed straddle had not been established.

The August 2013 temporary regulations changed the timing of the recognition of the unrealized gain or loss (as compared to provisions of 1985 temporary regulations that provided that unrealized gain or loss on a position that becomes a position in an indentified mixed straddle is recognized on the day prior to establishing the identified mixed straddle).

Straddle gains and losses, thus, are to be governed by the rules applicable to identified mixed straddles. Read a discussion of the 2013 regulations in TaxNewsFlash-United States.

Final regulations

As noted above, the final regulations adopt the August 2013 regulations with changes made in response to comments.

First, the final regulations are not effective immediately on publication, but provide additional time and are effective for identified mixed straddles established 30 days after July 18, 2014. The final regulations expressly rejected a request that the applicability date be delayed for at least six months after July 18, 2014.

Second, the final regulations incorporate changes to address two technical issues:

  • The final regulations provide that the holding period reset rule that takes place on entering into an identified mixed straddle does not change the character of the unrealized gain or loss from the period prior to the date the identified mixed straddle was established.
  • The final regulations also provide that the term “unrecognized gain” for purposes of section 1092(a) and Reg. section 1.1092(b)-3T(b) includes the unrealized gain from the period prior to the date an identified mixed straddle was established.

Third, the final regulations do not adopt comments that no new regulations on identified mixed straddles be issued because insurance companies rely on existing regulations to control the timing of capital gain recognition on bonds in their portfolios. The preamble to the final regulations states that these rules are being adopted to prevent selective recognition of gains and losses through the mechanism of an identified mixed straddle even though no disposition has occurred.

Finally, concerning comments about the 1985 temporary regulations and requests for technical amendments, the preamble to the final regulations states that the IRS and Treasury did not believe it is appropriate to address these comments in today’s final regulations.

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