Understanding Synthetic Dispositions – Forward Sale, Securities

In the May 8 issue of KBR, the article “Understanding Synthetic Dispositions” explained the concepts of synthetic dispositions and their tax implications. In this issue, we provide an example involving the forward sale of securities.

Example: Synthetic Disposition –
Forward Sale, Securities

Issue: Irene owns 100 shares of XYZ Corporation which she purchased for $10/share. The shares are currently trading at $12/share.  Irene enters into an agreement to sell the shares on July 1, 2015 to Harry for $15/share regardless of their value at the time. How is this transaction taxed?

Answer: If the agreement was entered into before budget day (March 21, 2013), there would be no consequences until 2015 because Irene continues to own the shares and no money changes hands until 2015. In 2015, Irene would have a capital gain of $15/share - $10/share = $5/share.

If the agreement was entered into after March 21, 2013, Irene would be deemed to have disposed of the shares at that time for their fair market value ($12/share) and to have immediately reacquired them. This would result in a capital gain of $2/share at the time of the agreement. Further in 2015, when the shares are actually purchased, Irene would have an additional capital gain of $15/share - $12/share = $3/share.

NEXT TIME:   Example: Synthetic Disposition – Forward Sale, Other Assets