Income Tax Treatment of Hedges

Abstract

<p>After aggressively pressing the position that commodity hedges, including short sales, produced capital gain or loss treatment, IRS lost a key decision on June 17, 1993. Now, the Department of the Treasury in temporary and proposed regulations, has abandoned its previous position and agrees that gains and losses from most hedging transactions are considered to be ordinary gains and losses. Under the authority of Arkansas Best Corp. v. Comm'r, IRS had contended that such losses were capital in nature which could offset capital gains and, for individuals, up to $3,000 of ordinary income. The temporary and proposed regulations are very good news for those hedging commodities and essentially confirm the position adopted in the FNMA case.</p>