IRS Quashes Conversion Treatment for Basket Option Contracts
Posted by William Byrnes on March 16, 2012
Long-term gains yield more favorable tax costs than short-term gains. Short-term gains carry an additional 20% tax cost over long-term gains, encouraging the manufacturing of transactions designed to convert short-term to long-term gains. Unfortunately, these transactions attract undue attention from the IRS and are often disregarded by the Service. The IRS recently considered the tax treatment of one of these gain-recharacterization schemes, a basket option contract, in a generic legal advice memorandum (AM 2010-005).
The IRS altered its categorization of the contract, viewing it as if the investor purchased the securities in a margin account, paying cash equal to 10% of the value of the securities and borrowing 90% of the value from the investment bank. Just as was the case with the “option,” the investor had almost total control over investment of the securities and would reap all appreciation and income from the securities, less interest and brokerage fees.
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This entry was posted on March 16, 2012 at 06:00 and is filed under Wealth Management. Tagged: Futures, Futures contract, Internal Revenue Service, IRS, Options, Recharacterisation, Security (finance), tax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.