QQQ options and 1256

I continue to stand behind our position to treat the taxation of options on ETFs the same as options on stocks and not as an IRC Section 1256 future contract until further guidance is issued by the IRS.

Additionally, we believe that Traders Accounting is incorrect in their interpretation of an old Revenue Ruling issued by the IRS. As Traders Accounting doesn�t provide you with the link or reference to the actual �internal ruling by the IRS� referred on their site, I believe the ruling that Traders Accounting is referring to is Revenue Ruling 94-63, I.R.B. 1994-41,5, September 27, 1994. (as discussed below)

In comparing the options on ETFs to the holdings of Revenue Ruling 94-63, there is still no clear guidance that options on ETFs will be treated as IRC Section 1256 contracts. This is mainly due to the fact that Revenue Ruling 94-63 provides that the options must settled in cash.

As provided by the CBOE (see below) , it is clear that options on ETFs are physically settled and not settled in cash as is one of the requirements stated in Revenue Ruling 94-63 for IRC Section 1256 treatment.

Hopefully, we will receive final guidance from the IRS on the treatment of options on ETFs exclusively soon.

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Per Revenue Ruling 94-63:

Sec. 1256 contracts marked to market: Nonequity options: Options to buy and sell: Stock options.--The IRS has determined the circumstances under which stock index options would be treated as "Sec. 1256 contracts" where the trading is permitted by the Securities and Exchange Commission but the Commodity Futures Trading Commission has not designated a market for a futures contract based on the stock index. Options based on a stock index that are traded on, or subject to the rules of, a qualified exchange would be treated as "Sec. 1256 contracts" if (1) the options provide for cash settlement and (2) the SEC has determined that the stock index is a "broad-based" index. Further, the IRS determined that warrants will be treated as options based on a stock index if they are, economically, substantially identical in all material respects to options based on a stock index.

For a full reading of Revenue Ruling 94-63, please refer to the following link: http://www.taxlinks.com/rulings/1994/revrul94-63.htm

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As we have previously posted from the following page of the CBOE:
http://www.cboe.com/OptProd/OptionsOnETFs.asp

Options on Exchange Traded Funds and HOLDRs

CBOE trades options on Exchange Traded Funds (ETFs) and HOLding Company Depositary Receipts (HOLDRs). ETFs are shares of trusts that hold portfolios of stocks designed to closely track the price performance and yield of specific indices. HOLDRs are trust-issued receipts that represent an investor's beneficial ownership of a specified group of stocks. HOLDRs allow investors to benefit from the ownership of stocks in a particular industry, sector or group.

As ETFs and HOLDRs trade like stock (see ETF Specifications for details), options on these products are operationally similar to options on stock. Options on ETFs and HOLDRs are physically settled and have an American-style exercise feature. LEAPS are offered on some of the products.