(2) Offsetting positions
(A) In general
A taxpayer holds offsetting positions with respect to personal property if there is a substantial diminution of the taxpayers risk of loss from holding any position with respect to personal property by reason of his holding 1 or more other positions with respect to personal property (whether or not of the same kind).
(B) Special rule for identified straddles
In the case of any position which is not part of an identified straddle (within the meaning of subsection (a)(2)(B)), such position shall not be treated as offsetting with respect to any position which is part of an identified straddle.
(A) In general
For purposes of paragraph (2), 2 or more positions shall be presumed to be offsetting if
(i) the positions are in the same personal property (whether established in such property or a contract for such property),
(ii) the positions are in the same personal property, even though such property may be in a substantially altered form,
(iii) the positions are in debt instruments of a similar maturity or other debt instruments described in regulations prescribed by the Secretary,
(iv) the positions are sold or marketed as offsetting positions (whether or not such positions are called a straddle, spread, butterfly, or any similar name),
(v) the aggregate margin requirement for such positions is lower than the sum of the margin requirements for each such position (if held separately), or
(vi) there are such other factors (or satisfaction of subjective or objective tests) as the Secretary may by regulations prescribe as indicating that such positions are offsetting.
For purposes of the preceding sentence, 2 or more positions shall be treated as described in clause (i), (ii), (iii), or (vi) only if the value of 1 or more of such positions ordinarily varies inversely with the value of 1 or more other such positions.
(B) Presumption may be rebutted
Any presumption established pursuant to subparagraph (A) may be rebutted.
(4) Exception for certain straddles consisting of qualified covered call options and the optioned stock
(A) In general
(i) all the offsetting positions making up any straddle consist of 1 or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and
(ii) such straddle is not part of a larger straddle,
such straddle shall not be treated as a straddle for purposes of this section and section 263 (g).
(B) Qualified covered call option defined
For purposes of subparagraph (A), the term qualified covered call option means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if
(i) such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph,
(ii) such option is granted more than 30 days before the day on which the option expires,
(iii) such option is not a deep-in-the-money option,
such option is not granted by an options dealer (within the meaning of section 1256 (g)(8)
) in connection with his activity of dealing in options, and
(v) gain or loss with respect to such option is not ordinary income or loss.
(C) Deep-in-the-money option
For purposes of subparagraph (B), the term deep-in-the-money option means an option having a strike price lower than the lowest qualified bench mark.
(D) Lowest qualified bench mark
(i) In general Except as otherwise provided in this subparagraph, for purposes of subparagraph (C), the term lowest qualified bench mark means the highest available strike price which is less than the applicable stock price.
Special rule where option is for period more than 90 days and strike price exceeds $50 In the case of an option
(I) which is granted more than 90 days before the date on which such option expires, and
(II) with respect to which the strike price is more than $50,
the lowest qualified bench mark is the second highest available strike price which is less than the applicable stock price.
85 percent rule where applicable stock price $25 or less If
(I) the applicable stock price is $25 or less, and
(II) but for this clause, the lowest qualified bench mark would be less than 85 percent of the applicable stock price,
the lowest qualified bench mark shall be treated as equal to 85 percent of the applicable stock price.
Limitation where applicable stock price $150 or less If
(I) the applicable stock price is $150 or less, and
(II) but for this clause, the lowest qualified bench mark would be less than the applicable stock price reduced by $10,
the lowest qualified bench mark shall be treated as equal to the applicable stock price reduced by $10.
(E) Special year-end rule
Subparagraph (A) shall not apply to any straddle for purposes of section 1092 (a)
(i) the qualified covered call options referred to in such subparagraph are closed or the stock is disposed of at a loss during any taxable year,
(ii) gain on disposition of the stock to be purchased from the taxpayer under such options or gains on such options are includible in gross income for a later taxable year, and
such stock or option was not held by the taxpayer for 30 days or more after the closing of such options or the disposition of such stock. For purposes of the preceding sentence, the rules of paragraphs (3) (other than subparagraph (B)
thereof) and (4) of section 246 (c)
shall apply in determining the period for which the taxpayer holds the stock.
(F) Strike price
For purposes of this paragraph, the term strike price means the price at which the option is exercisable.
(G) Applicable stock price
For purposes of subparagraph (D), the term applicable stock price means, with respect to any stock for which an option has been granted
(i) the closing price of such stock on the most recent day on which such stock was traded before the date on which such option was granted, or
(ii) the opening price of such stock on the day on which such option was granted, but only if such price is greater than 110 percent of the price determined under clause (i).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph. Such regulations may include modifications to the provisions of this paragraph which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes.