Understanding Tax Straddles Form 6781 for Options Trading

Thanks for the response! So SPX and SPY options are treated differently? I didn't realize that. Are there any specific identifiers I should be looking for in my trading statements to know which transactions go where? And do I need to list every single trade individually or can I summarize them somehow?

SPX options are considered Section 1256 contracts because they're broad-based index options regulated by the CBOE. Your brokerage statements should identify them as "index options" or specifically "section 1256 contracts" - they get the 60/40 tax treatment regardless of holding period. For Part I, you can report the aggregate profit/loss from all your Section 1256 contracts - you don't need to list each trade separately. But keep detailed records in case of an audit. For Part II (straddles), you'll need more detailed information about offsetting positions, including dates established, dates closed, and the specific gains/losses for each position.

Does taxr.ai work with data from any brokerage? I trade on TD Ameritrade and have hundreds of options transactions. Would it be able to handle that volume and correctly identify straddles?

I'm a bit skeptical about tax software specifically for trading. How accurate is it for identifying straddles? The rules about what constitutes substantially similar positions can be really subjective.

Yes, it works with all major brokerages including TD Ameritrade. You can just upload your transaction history CSV or PDF statements, and it handles high volume trading without issues. I had over 500 trades last year and it processed everything smoothly. For straddle identification, it uses IRS guidelines about substantially similar positions and risk reduction. It found straddles I didn't even realize I had created across different tickers that were highly correlated. You can also review and adjust its determinations if you disagree with any of them.

How does this actually work? Seems too good to be true. The IRS phone lines are notoriously impossible to get through.

I'm extremely skeptical. How could a third-party service magically get through when the IRS phone system is designed to handle calls in order? Sounds like a scam to me.

It uses an automated system that continually redials and navigates the IRS phone tree until it gets through to a representative. It essentially does the waiting for you. Once an agent answers, the service calls you and connects you directly. I was skeptical too, but it's legitimate. The service doesn't have access to your personal tax information - it just makes the phone connection. When the IRS agent came on the line, I provided my information directly to them just like a normal call. The difference is I didn't have to spend hours hitting redial and listening to hold music.

Is there a specific threshold for what "substantially diminishes" risk means? Like if I have puts that only cover 25% of my call position value, is that still a straddle?

There's no exact percentage threshold defined by the IRS for what "substantially diminishes" means. It's more about whether the position materially reduces your risk exposure. Generally, if your puts would offset 25% of potential losses from your calls, that might not be enough to qualify as "substantially" reducing risk. The IRS looks at the economic reality of your combined positions. Courts have previously ruled that a "substantial diminution of risk" means the reduction is significant enough that it would affect an investor's decision-making. It's a facts-and-circumstances test rather than a bright-line rule.

I tried using TurboTax last year for my options trading and it was a disaster for straddles. It doesn't have good guidance for Form 6781 and I ended up having to manually override a lot of things. The section 1256 contracts part was ok but the straddle identification and reporting was really lacking.

This is really helpful advice! I'm definitely going to create that spreadsheet you mentioned. Quick question - when you say "offsetting position," how close do the strike prices need to be to qualify? For example, if I had SPY calls at $450 and puts at $440, would that ten-point difference still make them offsetting positions for straddle purposes? I'm trying to figure out which of my trades I actually need to worry about for Form 6781.

Great question about strike price differences! The IRS doesn't specify exact dollar amounts for what constitutes "offsetting" positions - it's more about whether the combined positions substantially reduce your overall risk exposure. In your SPY example with $450 calls and $440 puts, that $10 spread could potentially still qualify as offsetting positions depending on other factors like expiration dates, position sizes, and the overall price of the underlying. If SPY was trading around $445 when you held both positions, those strikes would provide meaningful protection against each other. The key test is whether one position would gain value when the other loses value in a way that materially reduces your net risk. A $450 call and $440 put on the same expiration would definitely move in opposite directions, so they could form a straddle even with that strike difference. I'd recommend documenting all potentially offsetting positions in your spreadsheet and then making the determination based on the economic reality of each pair. When in doubt, it's often safer to report questionable positions as straddles rather than risk the IRS determining you should have reported them later.

This is exactly the kind of detailed explanation I was hoping for! The mark-to-market requirement for SPX options even on open positions is something I completely missed. So if I understand correctly, if I bought SPX calls in December that I'm still holding, I need to calculate their fair market value on December 31st and report that as if I sold them? And for the loss deferral on SPY straddles - is there a specific formula for calculating how much of the loss gets deferred, or is it just the amount of unrecognized gain in the offsetting position? I'm worried I might have some of these situations in my trading history that I haven't identified yet. Your point about documentation is well taken too. I've been pretty casual about record keeping but it sounds like I need to get much more organized about tracking the relationship between positions.

Exactly right on the SPX mark-to-market! You'll need to determine the fair market value of your open SPX positions as of December 31st and report the difference between that value and your cost basis. Most brokerages will actually provide this information on your year-end statements for Section 1256 contracts, but if not, you can use the closing prices on December 31st. For the loss deferral calculation, it's generally the lesser of: (1) the loss you realized on the closed position, or (2) the unrecognized gain in the offsetting position as of the date you closed the loss position. So if you closed SPY calls for a $1,000 loss while holding offsetting puts with $800 of unrecognized gains, you'd defer $800 of that loss. One thing to watch for - the deferral rules can get complex when you have multiple overlapping positions or when you close positions at different times. I'd strongly recommend getting your records organized before diving into the calculations. Create a timeline showing when each position was opened, when offsetting positions existed, and when things were closed. This will help you identify all the potential straddle situations you need to analyze.