Friday, February 15, 2013
Tax reform, at least in American politics these days, is generally discussed at only the most abstract level. There is general agreement that it would be nice to lower tax rates while broadening the base by getting rid of loopholes. The latter, of course, are seldom specified in any detail, and are very much in the eye of the beholder.
If real tax change is ever to be adopted, we are going to have to be specific on small things as well as large.
Representative Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, has taken an impressive step in that direction with a proposal to make substantial changes in the taxation of financial instruments. ...
There are many tax-oriented strategies to create differing tax treatments for what are actually offsetting investments. The idea is to have a loss treated as ordinary income, and recognized as soon as possible, while the offsetting gain is delayed and then treated as a long-term capital gain if that is possible.
The Camp proposal would establish a general rule that both arms of an offsetting strategy will be taxed as ordinary income or loss on a mark-to-market basis at the end of each year. So if one position made money while the other lost, they would wash each other out. There would be little reason to enter into many such transactions. And derivatives — except those that businesses use in ways that qualify for hedge accounting — will automatically be marked to market. ...
[T]he Camp proposal may be a start to reaching consensus on some of the details that would be in any successful compromise.
For more on the Camp proposal, see:
- Chris Sanchirico (Pennsylvania), Camp’s Investment Tax Plan: Implications for Lower Rates on Capital Gains?, (TaxVox Blog) (Jan. 31, 2013)
- Victor Fleischer (Colorado), A Sensible Change in Taxing Derivatives (New York Times) (Feb. 8, 2013)
Prior TaxProf Blog coverage:
- David M. Schizer (Dean, Columbia), Balance in the Taxation of Derivative Securities: An Agenda for Reform, 104 Colum. L. Rev. 1886 (2004).
- Yoram Keinan (Michigan), United States Federal Taxation of Derivatives: One Way or Many?, 61 Tax Law. 81 (2007).
- Adam Rosenzweig (Washington U.), Taxation, Risk and Derivatives: Does an Income Tax Subsidize Hedge Funds? (2008)
- Erika W. Nijenhuis (Cleary Gottlieb Steen & Hamilton, New York), New Tax Issues Arising From Derivatives Regulatory Reform, 127 Tax Notes 1235 (June 14, 2010)
- GAO, Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse (Oct. 21, 2011)
- Alex Raskolnikov (Columbia), Taxation of Financial Products: Options for Fundamental Reform, 133 Tax Notes 1549 (Dec. 19, 2011)