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Constructive sale

A US rule treating an appreciated position as sold when you eliminate essentially all risk and reward, such as by shorting the same stock against the box or entering an offsetting contract.

The rule exists to stop investors locking in a gain while deferring tax indefinitely. Entering a short sale of the same or substantially identical property, an offsetting notional principal contract, or a futures or forward to deliver it, generally triggers immediate recognition of the gain.

There is a closing exception: if the offsetting transaction is closed within 30 days after year end and the original position is held unhedged and at risk for 60 days afterwards, the constructive sale can be unwound.

Collars and married puts sit in a spectrum. A protective put that leaves meaningful upside is generally fine, while a tight zero-cost collar with almost no residual exposure invites the argument, and straddle-rules can bite even where the constructive sale rule does not.

General information for the United States, not tax advice; rules change and depend on your circumstances, so take professional advice.

Related: straddle-rules, collar, protective-put, holding-period, short-selling

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long straddle at expiryA V shape with its point at the strike and both arms rising through zero as the price moves away.Profit / loss per share08090110120Profit if the move is big enough, in either directionStrike 100Breakeven 92Breakeven 108Max loss 8 — both premiums, if it finishes at 100Underlying price at expiry
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.

Educational only, not advice. Spotted an error? Post in Site Feedback.