Hedging And Net Investment Income Tax

[Jim Meade / Iowa City]

According to Iowa State CALT, farmers don't have to pay the 3.8% NIIT on gains from hedging.  But, what is hedging?

If a farmer plans to grow 100,000 bushel of corn and sells 75,000 bushels in futures and forward cash sales, that is surely hedging.

But, what happens if a farmer plans to grow 100,000 bushels of corn and sells 200,000 bushels in futures?  Is this still hedging?

What about the farmer who plans to grow 100,000 bushels of corn and sells 75,000 bushels on the board, then buys back 75,000 bushels at a profit, sells 75,000 again and so forth.  The farmer is obviously rolling over more than 100,000 bushels of corn.  Is this still hedging?

What we're looking for here is the IRS definition of hedging, not what we would like to claim based on our own personal definition.  Does anyone know how the IRS definition of hedging fits the above scenarios?

Here's the CALT articlle:

https://www.calt.iastate.edu/analyzing-hedging-under-obamacare’s-net-investment-income-tax-final-reg...

[kraft-t]

I wonder Jim How the commercials handle such trades. I wonder if their hedges are always pure hedges.

I know this some folk have a different definition of hedging than i do. Reducing risk via hedges versus increasing risk via hedges. Somehow my logic doesn't follow that.

[hardnox]

This isn't an answer but I can tell you this.

As far as the $3000 capital loss rule in regrds to non-hedging trades, my good friend and accountant tells me that he's seen an awful lot of year end commodity statements that kind of suggested that it wasn't all legitimate hedging but he's never seen the IRS challenge one with a farm return.

[Red Steele]

the bottom line on farmer hedging , and this supposedly is straight from an IRS source, is that if a farmer is doing trading, hedging, etc with crops he produces , in the normal amounts indicated by his acres, they are not going to waste time and resources challenging a properly labled "hedging" account.

If you open a futures account, they ask you if it is a hedging or spec account. At least my brokers did.

As far as worrying about paying the 3.8% tax, that is laughable since 90% of the accounts show a "hedging loss" over time. That is why mine sits empty.