Taxing Derivatives As Ordinary Income

From the Wall Street Journal via Across the Curve, May 18:

If Democrats retake the Senate this fall, tax policy will fall to Sen. Ron Wyden of Oregon, who is beginning to elaborate on his priorities and plans.

Mr. Wyden recently released a plan to overhaul the rules companies use to calculate their annual depreciation deductions on capital assets. On Wednesday, he will take aim at the use of derivatives as a tax-avoidance technique. Further detailed proposals are on the way to shrink the difference between the tax rules for most Americans and the very wealthy, the senator said.

“The fortunate can basically, with good tax counsel, figure out what they’re going to pay and when they’re going to pay it. So we would radically change that,” Mr. Wyden said in an interview. “We’re trying to lay out the ideas that we think are central to developing bipartisan tax reform.”

Mr. Wyden’s derivative proposal would require owners of certain derivatives to mark their value to market each year and pay income taxes on any gains as ordinary income, not at lower capital gains rates. The plan would also require taxpayers to pay capital gains taxes as if they sold an asset in certain cases. That could be triggered, for example, if they enter into an agreement such as a collar, which uses put and call options to lock in future capital gains within a narrowly specified range without actually realizing those gains, said an aide to Mr. Wyden.

The proposal will exempt employee stock options and derivatives used to hedge business transactions as well as other derivatives commonly used by insurance companies, pension funds and others, the aide said....MORE