I agree with your statement if the broker adds the Call Premium into the MLP unit purchase then their method of mark to market accounting would be logical.
But they don't add the section 1256 mark to market value into the MLP cost basis. Because the MLP is a pantnership rather than a stock they only use the actual unit purchase amount (ie, the strike price) as the amount of capital contributed to the partnership for the purchased units in the call execution. The partnership knows nothing about the option.
Therefore I think the option should be treated as a standalone transaction. I bought an option for $1.50, and when it was worth $3 I exercised it and it was then worth zero. Section 1245 gain loss on that standalone transaction is (+$3 mark to market) + ((negative $3) option goes to zero loss) + (-($1) call premium paid) for a loss of $1.00 as the section 1256 loss on the standalone option transaction. The purchased units get a cost basis of $2.50. That makes complete sense.
What is the reason that the fact that the section 1256 option contract (my asset) - which has gone from it's value (the Mark to Market gain number) to zero - is NOT part of the section 1256 calculation? Pre exercise I had an option worth $3.00 (in the money that amount) and post exercise that option asset is worth zero. (in other words, it's a $3.00 loss).
Why is the loss of that option asset not part of the section 1256 profit / loss calculation?
Do you know where in the tax code it says to exclude the loss of the option in the section 1256 gain/loss calculation? Without it, the taxation doesn't make sense as the option premium doesn't get reported to the partnership at any brokerage. and the MLP and call option holders gets double taxed, once on exercise and again when I sell the low cost basis units. With it, the taxation makes complete sense.
I understand your opinion, but where in the tax code the basis of your opinion?
