Legislative update - Ways and Means chair proposes reform of taxation of financial instruments 

The proposal primarily would address six areas involving financial derivatives.

• First, it proposes annual mark-to-market accounting for certain financial derivates and certain straddles excluding business hedges.
• Second, it proposes to simplify the business hedging rules and specifically certain identification rules.
• Third, it proposes rules to prevent phantom cancellation-of- indebtedness income from debt restructurings involving certain significant modifications.
• Fourth, it proposes changes to the market discount rules including requiring a holder to recognize such discount over the remaining life of a bond instead of upon a sale or exchange.
• Fifth, it proposes that a taxpayer’s cost basis in certain substantially identical securities be determined on an average cost basis amount to increase the accuracy of determining gains and losses.
• Finally, it proposes expanding the wash sales rules to include transactions involving certain related parties

Read a Ways and Means technical explanation [PDF 133 KB] of the proposals.

Read the legislative language [PDF 139 KB] of the proposals.

Background

The Joint Committee on Taxation 13 months ago released a report, Present Law and Issues Related to the Taxation of Financial Instruments and Products (JCX-56-11 (December 2, 2011)) [PDF 524 KB].

In that report, the JCT noted the financial crisis of 2008, the proliferation of financial product in recent decades, and concerns about “the inconsistent treatment of instruments with similar economic characteristics.”

Camp in late 2011 released a draft of reforms to international tax rules. He has said he intends to produce a comprehensive bill this year.

In releasing today’s draft, Chairman Camp said:

The U.S. is a leader in the financial world, but our broken and antiquated tax code has failed to keep up with the rapid pace of financial innovation on Wall Street. The lack of consistent and comprehensive tax policy has also contributed to some corporate scandals and the recent financial crisis that devastated our economy and threatened our standing in the global community. Updating these tax rules to reflect modern developments in financial products will make the code simpler, fairer and more transparent for taxpayers; and it will also help to minimize the potential for abuse that has occurred in the past.