May 2, 2017 Wyden introduces bill on taxation of derivatives Senate Finance Committee Ranking Member Ron Wyden (D-OR) on May 2, 2017, introduced a bill that aims to provide one set of clear rules for taxing derivatives by requiring the recognition of gains each year (mark to market) and applying ordinary tax treatment to them. The Modernization of Derivatives Tax (MODA) Act of 2017 is similar to a discussion draft issued a year ago, but includes technical modifications, many of which were based on stakeholder input. Wyden said derivatives are essentially a financial bet that a stock or other investment is going to go up or down in value, and that complex tax rules can be exploited to make financial bets relatively risk-free by delaying, minimizing or even avoiding taxes. Requiring mark-to-market and ordinary tax treatment for derivatives has been proposed in the past, but the bill goes further to create a more comprehensive regime for taxpayers that both have obligations or rights with respect to a derivative and also own the underlying investment. Wyden said it includes one rule for transaction timing (mark to market), one rule for character (ordinary), and one rule for source (taxpayer's country of residence). The Joint Committee on Taxation noted that it would expand the scope of the mark-to-market rule to a broader group of taxpayers and contracts than has been subject to the rule in the past, and has scored the bill as raising about $16 billion over 10 years. "Our tax code is riddled with loopholes and elite giveaways that unfairly benefit the fortunate few," Senator Wyden said. "This legislation takes aim at a loophole that allows sophisticated investors to artificially lower their tax bills. It also eliminates the ability for these taxpayers to pick and choose what kind of tax they want to pay, and when to pay it. Ending these aggressive tax planning tactics is critical to achieving comprehensive tax reform that benefits all Americans, not just those at the very top." A Wyden one-pager said the MODA is aimed at tax avoiders. It is "not aimed at the banks, businesses, and individuals that hedge business risks; or employees who receive stock options; or derivative transactions in pension funds, endowments, insurance contracts, or annuities; or transactions designed to keep mortgage rates low," the document said. The bill would exclude from capital treatment, and thus treat as ordinary in character, any bonds or other indebtedness held by most insurance companies. Regulatory authority is included to prevent the avoidance of Federal income tax through sales or exchanges of these types of insurance company assets. Text of the bill, a Wyden one-pager, and a section-by-section summary are attached. Other materials are here. ——————————————— Text of the Modernization of Derivatives Tax Act
Wyden one-pager
Section-by-section summary
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