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Chapter 8. Combination Conservative Tech... > Tax Problems with Combination Strate...

Tax Problems with Combination Strategies

The complexity of combination strategies is only one of the problems you have to sort through. As a conservative investor, you may prefer for simplicity, if only because basic conservative strategies involve fewer likely risks. The possible tax consequences may also discourage you from involvement with complex strategies.

Some forms of combinations create an unintentional wash sale, so profits or losses you intend to recognize in one particular tax year could be disallowed. Any “offsetting position” that creates a straddle could result in the loss of long-term capital gains status for long stock. The IRS definition of offsetting positions in which this could occur requires a “substantial diminution of risk of loss” in order for the capital gains penalty to apply. By definition, a conservative straddle makes sense only if it reduces your risk exposure, and under the tax rules, you do not have to actually cover stock to fall within the definition of having an offsetting position.


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