Legal Definitions - tax-straddle rule

The tax-straddle rule is a regulation that prevents individuals from deferring tax on income or converting ordinary income or short-term capital gain into long-term capital gain. This is done by disallowing the premature deduction of a loss on the sale or disposition of one leg of a straddle position while retaining the other, offsetting leg or position.

For example, if an investor holds contracts to buy and sell the same security or commodity, they may ensure a loss on one of the contracts to defer gains and use losses to offset other taxable income. However, the tax-straddle rule prevents them from prematurely deducting the loss on the sold contract while retaining the bought contract.

The tax-straddle rule has been greatly restricted by the requirement that gains and losses on commodities transactions must be reported based on their value at year-end.