Hedging Versus Speculation: The Key Points to Watch

Abstract

<p>After the Internal Revenue Service lost a key case, on June 17, 1993, <em>Federal National Mortgage Association v. Commissioner,</em><strong>1 </strong>the IRS position that futures market transactions<em> </em>involving the purchase of puts (short hedges) were not hedges and were to be treated as<em> </em>capital assets was demolished.<strong>2 </strong>The Department of the Treasury agreed that gains and<em> </em>losses from most hedging transactions were to be treated as ordinary gains and losses<em> </em>and immediately commenced a major effort to rewrite the regulations governing futures transactions to reflect that position. The proposed regulations were issued four months later<strong>3 </strong>and final regulations were promulgated in October of 1994.<strong>4</strong><em></em></p>