Wednesday, September 29, 2021
Lawrence Zelenak (Duke), The Deductibility of Capital Losses in a Mark-to-Market Regime, 172 Tax Notes Fed. 1965 (Sept. 20, 2021):
In this article, Zelenak considers the extent to which capital losses should be deductible under a mark-to-market regime applicable to the tradable assets of wealthy taxpayers, as advocated by Senate Finance Committee Chair Ron Wyden, D-Ore., in a 2019 paper.
The Wyden proposal raises, but does not discuss, the question of the extent to which mark-to-market losses should offset ordinary income; it does not raise (let alone discuss) the closely related question of carryovers of mark-to-market losses. This article has offered a historically informed analysis of the extent to which capital losses should be deductible under a mark-to-market regime. Although the history of capital loss treatments under our realization-based income tax is instructive, taxpayers’ inability to cherry-pick loss realization under a mark-to-market regime has major implications for the loss deductibility analysis. Thus the recommendations of this article are (1) that mark-to-market losses should be deductible against all types of current-year income, including ordinary income, and (2) that mark-to-market losses in excess of current-year income should carry forward indefinitely (to be deducted against all types of later-year income), but should not carry back.