Thanks for your comments. As you seem to disagree with the broker about whether or not MLP options are A) equity options, or B) section 1256 contracts, it makes the discussion sort of moot. Your comments about me adjusting my cost basis despite the broker's reporting is helpful.
Just a few comments in reply to what you wrote:
You - "As to the tax code on valuing an exercised option..."
Me - the broker is saying the MLP option is not an option, it is instead a Section 1256 Contract (which in this case does not settle for cash). Option tax law does not apply. I wonder where in the tax code it says that the Mark to Market accounting for the exercise of a Section 1256 Contract which does NOT settle for cash does not include the loss of value of the Section 1256 Contract in the gain/loss calculation? When I exercise a Section 1256 Contract worth $3 I lose the $3 asset, it seems to me, and the mark to market gain ($3) and option loss (-$3) should offset, leaving only the premium.
Where in the tax code does Section 1256 expiration (when not settled for cash) gain/loss calculation process say I'm wrong and the broker (which does not count the loss of value as the contract goes to zero worth) is right?
You - I suspect that the broker is wrong on this, since an equity option (which 1256 doesn't cover) includes any option "That is valued directly or indirectly by reference to any stock or narrow-based security index." That would seem to apply to any option on a single MLP.
Me - The broker is saying an MLP unit is not a stock, it is a partnership unit. C Corporations have stock, partnerships have publicly traded.......units. They're nitpicking, but they seem to have made up their mind. This decision by them (that MLPs are not stocks) is what produces the entire problem......
