The year-end tax straddle - the favorite device of commodity futures market participants to offset capital gains - is in jeopardy.
An Internal Revenue Service ruling issued this week could be the death knell for straddles as they are used by futures traders, especially those in the silver market.
A straddle trade involves the simultaneos buying and selling of futures contracts with different delivery months in the same commodity.
Silver traders, who traditionally triple or quadrupple the volume on the Commodity Exchange Inc. in New York with such transactions during late November, use straddles to carry over profits from one year to the next to transform short-term capital gains to long-term gains and to offset gains by what the IRS says are "artificial" losses.
In a ruling issued in respond to a taxpayer's request, the IRS held that a series of trades of balanced long and short positions in silver futures, which were eventually liquidated as losses, could not be deducted from short-term capital gains realized on a real estate transaction.
The agency found that such shuffling of transactions resulted "in no real change of position in a true economic sense." The IRS also said such transactions are not deductible when undertaken for the "dominant purpose" of creating artificial short-term losses.
Many commodity brokers and legal officers for brokerage firms contacted theis week said they would not comment on the ruling until they had viewed it. Most admitted that the regulation has cast a cloud of uncertainity on the silver market, especially since the ruling isretroactive to 1974.