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The Uneasy Case of Assignment of “Underwater” Derivative Positions  

Author:  Yoram  Keinan.

Source: Volume 29, Number 02, Winter 2012 , pp.3-21(19)

Journal of Taxation of Investments

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The Dodd-Frank Act has, among other things, raised questions about the tax consequences of an assignment or novation of a position in a derivative, especially where the taxpayer’s position is “under water.” This article addresses the timing of any gain/loss recognition to both parties and explains the issues surrounding whether any such gain or loss would be ordinary or capital.

Keywords: deductibility of assignment payment, income recognition, deduction recognition, capital vs. ordinary income or loss, choice of accounting method, Stavisky v. Commissioner, notional principal contract, IRC Sec. 1221, IRC Sec. 1234A

Affiliations:  1: Greenberg Traurig LLP .

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