The Bloomberg BNA Federal Tax Blog is a forum for practitioners and Bloomberg BNA editors to share ideas, raise issues, and network with colleagues about federal tax topics. The ideas presented here are those of individuals and Bloomberg BNA bears no responsibility for the appropriateness or accuracy of the communications between group members.
Wednesday, January 30, 2013
The House Ways and Means Committee believes that a leading cause of the 2008 financial crisis was the complicated set of rules on taxation of financial instruments and products. On January 24, 2013, the Committee released a discussion draft of proposals to reform the tax treatment of financial products; it offered this draft to obtain feedback from stakeholders, practitioners, economists, and members of the general public on how to improve the proposals.
In a major change from current law, financial derivatives would have to be marked to market under the Committee’s proposals. And, in a straddle that contains even one derivative position, all positions (including stock, debt, and other financial products that would not otherwise be marked to market under the proposals) would have to be marked to market. Not only that, but the proposals would treat any gains or losses from marking a derivative to market as ordinary. (In other words, the draft proposes repealing the 60/40 rules.)
It is not as drastic as it sounds. The proposals would exempt most hedging transactions from the mark-to-market rules; those rules would not apply to "common" transactions involving derivatives, such as hedges used by companies to mitigate the risk of price, currency, and interest rate changes in their business operations.
But, while this exemption may greatly soften the blow of the proposed mark-to-market requirements, doesn't it open the door to a flood of litigation? Wouldn’t it become fashionable to claim that many derivatives are hedges used to mitigate the risk of price in the taxpayer’s business operations? Or do other safeguards prevent this potential flood?
To track the Committtee’s proposals as they evolve and perhaps become legislation, see the chart at the link below. At present, it compares the Committee’s proposals with the Obama Administration’s Fiscal Year 2013 Budget proposals for reforming the taxation of financial instruments and products. Those too are likely to change as the next Budget is released, and the chart will be updated accordingly.
http://taxandaccounting.bna.com/btac/core_adp/get_object/FinancialProductTaxReformChart.pdf
--Allen Calhoun, Managing Editor for Business Entities & Tax Accounting (Bloomberg BNA Tax & Accounting)
You must Sign In or Register to post a comment.
What Self-Funded Group Health Plans Should Know About Transitional Reinsurance
Workforce Reduction Supplemental Benefits Can Affect Pension Benefits
Is the Obama Administration's Opposition to a Financial Transactions Tax Weakening?
EIN Inconsistency