Internal Revenue Service, Treasury § 1.1092(C)–1

Internal Revenue Service, Treasury § 1.1092(c)–1

gain on the non-section 1256 position. On Au- (b) Term limitation—(1) General rule. gust 23, Year 2, A enters into an offsetting Except as provided in paragraph (b)(2) section 1256 contract and makes a valid elec- of this section, an option is not a quali- tion to treat the straddle as a section fied covered call unless it is granted 1092(b)(2) identified mixed straddle. On Sep- tember 10, Year 2, A closes out the section not more than 12 months before the 1256 contract at a $500 loss and disposes of day on which the option expires or sat- the non-section 1256 position, realizing an isfies term limitation and qualified $875 gain. Under these circumstances, A has benchmark requirements established $400 of short-term capital gain attributable by the Commissioner in guidance pub- to the non-section 1256 position prior to the lished in the Internal Revenue Bulletin day the section 1092(b)(2) identified mixed (see § 601.601(d)(2)(ii)(b) of this chapter). straddle was established. The $400 unrealized (2) Special benchmark rule for an option gain earned on the non-section 1256 position will be recognized on September 10, Year 2, granted not more than 33 months before when the non-section 1256 position is dis- the day on which the option expires—(i) posed of. The gain will be short-term capital In general. The 12-month limitation de- gain. See § 1.1092(b)–2T for rules concerning scribed in paragraph (b)(1) of this sec- holding period. On September 10, Year 2, the tion is extended to 33 months provided gain of $875 on the non-section 1256 position the lowest qualified benchmark is de- will be reduced to $475 to take into account termined using the adjusted applicable the $400 of unrealized gain when the section 1092(b)(2) identified mixed straddle was es- stock price, as defined in § 1.1092(c)– tablished. The $475 gain on the non-section 4(e). 1256 position will be offset by the $500 loss on (ii) Examples. The following examples the section 1256 contract. The net loss of $25 illustrate the rules set out in para- from the straddle will be treated as 60% graph (b)(2)(i) of this section: long-term capital loss and 40% short-term capital loss because it is attributable to the Example 1. Taxpayer owns stock in Cor- section 1256 contract. poration X. Taxpayer writes an equity option with standardized terms on Corporation (c) Effective/applicability date. The X stock through a national securities ex- rules of this section apply to all sec- change with a term of 21 months. The appli- tion 1092(b)(2) identified mixed strad- cable stock price for Corporation X stock is dles established after the date of publi- $100. The bench marks for a 21-month equity cation of the Treasury decision adopt- option with standardized terms with an ap- ing these rules as final regulations in plicable stock price of $100 will be based upon the adjusted applicable stock price. Using the FEDERAL REGISTER. the table at § 1.1092(c)–4(e), the applicable (d) Expiration date. The applicability stock price of $100 is multiplied by the ad- of this section expires on August 1, justment factor 1.12, resulting in an adjusted 2016. applicable stock price of $112. Using the [T.D. 9627, 78 FR 46809, Aug. 2, 2013, as amend- bench marks for an equity option with ed at 78 FR 64397, Oct. 29, 2013] standardized terms with an adjusted applicable stock price of $112, the highest available § 1.1092(c)–1 Qualified covered calls. strike price less than the adjusted applicable stock price is $110, and the second highest (a) In general. Section 1092(c) defines strike price less than the adjusted applicable a straddle as offsetting positions with stock price is $105. Therefore, a 21-month eq- respect to personal property. Under uity call option with standardized terms on section 1092(d)(3)(B)(i)(I), stock is per- Corporation X stock will not be deep in the sonal property if the stock is part of a money if the strike price is not less than straddle that involves an option on $105. Example 2. Taxpayer owns stock in Cor- that stock or substantially identical poration Y. Taxpayer writes an equity op- stock or securities. Under section tion with standardized terms on Corporation 1092(c)(4), however, writing a qualified Y stock through a national securities ex- covered call option and owning the change with a term of 21 months. The appli- optioned stock is not treated as a cable stock price for Corporation Y stock is straddle under section 1092 if certain $13.25. The bench marks for a 21-month eq- conditions, described in section uity option with standardized terms with an 1092(c)(4)(B), are satisfied. Section applicable stock price of $13.25 will be based upon the adjusted applicable stock price. 1092(c)(4)(H) authorizes the Secretary Using the table at § 1.1092(c)–4(e), the applica- to modify these conditions to carry out ble stock price of $13.25 is multiplied by the the purposes of section 1092(c)(4) in adjustment factor 1.12, resulting in an ad- light of changes in the marketplace. justed applicable stock price of $14.84. Using

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the bench marks for an equity option with business days after the day on which standardized terms with an adjusted applica- the option is granted, and a single fixed ble stock price of $14.84, the highest avail- strike price, as defined in § 1.1092(c)– able strike price less than the adjusted appli- 4(d), that is payable entirely at (or cable stock price is $12.50. However, under section 1092(c)(4)(D), the lowest qualified within 5 business days of) exercise; bench mark can be no lower than 85% of the (iii) An equity option with standard- applicable stock price, which for Corporation ized terms is outstanding for the un- Y stock is $12.61 (85% of the adjusted applica- derlying equity; and ble stock price of $14.84). Thus, because the (iv) The underlying security is stock highest available strike price less than the in a single corporation. adjusted applicable stock price for an equity (2) Lowest qualified bench mark—(i) In option with standardized terms is lower than general. For purposes of determining the lowest qualified bench mark under section 1092(c)(4)(D), the lowest strike price at whether an equity option with flexible which a qualified covered call option can be terms is deep in the money within the written is the next higher strike price, or meaning of section 1092(c)(4)(C), the $15.00. Therefore, a 21-month equity call op- lowest qualified bench mark under section with standardized terms on Corporation tion 1092(c)(4)(D) is the same for an eq- Y stock will not be deep in the money if the uity option with flexible terms as the strike price is not less than $15. lowest qualified bench mark for an eq- (c) Effective date. This section applies uity option with standardized terms on to qualified covered call options en- the same stock having the same appli- tered into on or after July 29, 2002. cable stock price. (ii) Examples. The following examples [67 FR 20899, Apr. 29, 2002] illustrate the rules set out in para- § 1.1092(c)–2 Equity options with flexi- graph (c)(2)(i) of this section: ble terms. Example 1. Taxpayer owns stock in Cor- (a) In general. Section 1092(c)(4) pro- poration X. Taxpayer writes an equity call vides an exception to the general rule option with flexible terms on Corporation X that a straddle exists if a taxpayer stock through a national securities exchange for a term of not more than 12 months. The holds stock and writes a call option on applicable stock price for Corporation X that stock. Under section 1092(c)(4), the stock is $73.75. Using the bench marks for an ownership of stock and the issuance of equity option with standardized terms with a call option meeting certain require- an applicable stock price of $73.75, the high- ments result in a qualified covered est available strike price less than the appli- call, which is exempted from the gen- cable stock price is $70, and the second high- eral straddle rules of section 1092. This est strike price less than the applicable section addresses the consequences of stock price is $65. Therefore, an equity call the availability of equity options with option with flexible terms on Corporation X stock with a term of 90 days or less will not flexible terms under the qualified cov- be deep in the money if the strike price is ered call rules. not less than $70. If the term is greater than (b) No effect on lowest qualified bench 90 days, an equity call option with flexible mark for standardized options. The avail- terms on Corporation X will not be deep in ability of strike prices for equity op- the money if the strike price is not less than tions with flexible terms does not af- $65. fect the determination of the lowest Example 2. Taxpayer owns stock in Cor- qualified bench mark, as defined in sec- poration Y. Taxpayer writes a 9-month equity call option with flexible terms on Cor- tion 1092(c)(4)(D), for an equity option poration Y stock through a national securi- with standardized terms. ties exchange. The applicable stock price for (c) Qualified covered call option sta- Corporation Y stock is $14.75. Using the tus—(1) Requirements. An equity option bench marks for an equity option with with flexible terms is a qualified cov- standardized terms with an applicable stock ered call option only if— price of $14.75, the highest available strike (i) The option meets the require- price less than the applicable stock price is ments of section 1092(c)(4)(B) and $12.50. However, under section 1092(c)(4)(D), § 1.1092(c)–1 (taking into account para- the lowest qualified bench mark can be no lower than 85% of the applicable stock price, graph (c)(2) of this section); which for Corporation Y stock is $12.54. (ii) The only payments permitted Thus, because the highest available strike with respect to the option are a single price less than the applicable stock price for fixed premium paid not later than 5 an equity option with standardized terms is

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