Before 1981, commodity transactions were used to create “silver butterflies,” “gold cash-and-carry transactions,” and “T-bill rolls” to defer and convert ordinary income into capital gains. In June 1980, however, the process of tax reform in the commodity area began, and the butterflies began to take flight.
The Economic Recovery Tax Act of 1981 (ERTA) enacted a set of new rules to reform the world of financial transactions, which at that time consisted mainly of commodity derivative transactions. ERTA dealt comprehensively with commodity transactions by imposing the recognition of losses on straddle positions under section 1092, requiring regulated futures contracts to be marked to market under section 1256, requiring the capitalization of interest and carrying charges for straddle positions under section 263(g), and settling the “confusion” that had arisen regarding the treatment of some contract rights under section 1234A. Rather than undergoing reform, however, section 1234A has increased uncertainty and muddied the treatment of some contract rights.
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