Some hedge funds are racking up large unrealized gains in their portfolios, prompting them to reduce their tax exposure. Affirmative use of the constructive sale rules can help a fund to hedge an appreciation through the end of the year without recognizing the taxable gain. This rule triggers recognition of a taxable gain when a taxpayer holds this appreciated financial position and enters into enumerated offsetting transactions. There is an exception, however—if the transaction is closed on or before the 30th day after the close of the taxable year, if the taxpayer holds the appreciated position for 60 days beginning on the date the offsetting position closed, and if at no time during that period the taxpayer does not hedge the appreciated position, then the transaction is as if a constructive sale never occurred. Accordingly, those hedge funds looking to preserve gains in fourth quarter financial uncertainty can avoid breaking the constructive sale rules while doing so in a tax efficient manner.
See Dominic Reilly, Ted Dougherty and Lisa Sergi – Tax Planning Using the Constructive Sales Rules – When Is a Constructive Sale Not a Constructive Sale?, Wealth Strategies Journal, October 21, 2016.
