What Happens If a Trader Does Not Make a Mixed Straddle Election?
If no election is made, the trader must separately track and apply the rules for each position. The Section 1256 contracts are subject to 60/40 and mark-to-market, and the non-1256 contracts are subject to standard capital gain/loss rules.
This requires complex offsetting rules to prevent the recognition of a loss on one leg before the gain on the other.
Glossar
Section 1256 Contracts
Taxation ⎊ Section 1256 Contracts, within the context of cryptocurrency derivatives and options, denote financial instruments specifically designated under Section 1256 of the Internal Revenue Code, resulting in a present value treatment of gains and losses as ordinary income or loss rather than capital gains or losses.
Straddle
Strategy ⎊ A straddle is an options trading strategy involving the simultaneous purchase or sale of both a call option and a put option on the same underlying asset.
Mixed Straddle
Combination ⎊ This describes a strategy where a standard straddle (long call and long put) is combined with an offsetting position in the underlying asset or a related derivative instrument.
Non-1256 Contracts
Classification ⎊ ⎊ Non-1256 contracts, within the realm of cryptocurrency derivatives, represent financial agreements not meeting the specific criteria outlined in Section 1256 of the U.S.