Wright v. Comm’r of Internal Revenue

Internal Revenue Code section 1256 provides that an investor who holds certain derivatives at the close of the taxable year must “mark to market” by treating those derivatives as having been sold for fair market value on the last business day of the taxable year. A “foreign currency contract” is a “section 1256 contract” that an investor must mark to market. Contending that a foreign currency option is within the definition of “foreign currency contract," the Wrights claimed a large tax loss by marking to market a euro put option upon their assignment of the option to a charity. The Wrights’ assignment of the option was part of a series of transfers of mutually offsetting foreign currency options that they executed over three days. These transactions apparently allowed the Wrights to generate a large tax loss at minimal economic risk or out-of-pocket expense. The Tax Court held that the Wrights could not recognize a loss upon assignment of the euro put option because the option was not a “foreign currency contract” under section 1256. The Sixth Circuit reversed. While disallowance of the claimed tax loss makes sense as tax policy, the statute's plain language clearly provides that a foreign currency option can be a “foreign currency contract.” View "Wright v. Comm'r of Internal Revenue" on Justia Law