U.S. Sen. Ron Wyden (D-OR) introduced legislation recently that seeks to close loopholes that allow investors to use derivatives contracts to evade taxes on the underlying investments.
Derivatives are a financial bet that a stock or other investment will go up or down in value. Some investors are able to exploit complex tax rules to make these bets risk-free by avoiding, deferring or minimizing paying tax. For example, explained Wyden, a forward contract allows an investor to secure a low tax rate if they expect the underlying investment to gain significant value.
Wyden’s bill, the Modernization of Derivatives Tax Act, would require investors to annually pay tax on their gains or deduct their losses. Further, gains would be taxed at ordinary income rates, which is already the case for banks and securities dealers with respect to derivatives. In addition, the bill would also repeal nine tax code sections and revise many others, making the code less complex.
“This bill is about closing glaring loopholes that allow wealthy investors to get away with opting out of paying a fair share in taxes on profits from their bets on financial markets,” Wyden, ranking member on the Senate Finance Committee, said. “Typical Americans who work for a living pay taxes on what they make every year, and that same basic principle ought to apply to rich investors too.”
The bill would raise $16.5 billion in taxes over 10 years, according to estimates by the Joint Committee on Taxation.