About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

16 IRET Congressional Advisory 1 (1993)

handle is hein.taxfoundation/iretcgadv0015 and id is 1 raw text is: IRE Advio June 3, 1993 No. 16 HOUSE TAX BILL CONVERSION PROVISION: FUTURES OUT, OPTIONS IN, RISKS UP The House-passed tax bill would tax capital gains on commodities and stocks as if they were ordinary income if the positions were hedged by means of futures contracts. The Committee print claims that a hedged position - in which the holder of the stock or commodity has a firm agreement to sell the asset to a buyer at a certain price at a specific future date - is indistinguishable from loans in terms of the returns anticipated and the risks borne by the taxpayer. The asset- holder is supposedly in a position like that of a lender Ways and Means It is ludicrious tax p the r~eturins of on tr-ansaction ais orA income and the loss party to the same capital losses, yet t1 House bill does. whose income is due to the time value of money rather than market risk, earning interest rather than profits from speculation. The contention is absurd. The rationale is based on brainless semantics, not economics. The problem, as the House sees it, is this. Suppose X bought $100 of gold bullion, cotton, or World Wide Widget Corporation stock and agreed to sell it (or some similar property) to Y at some future date for $115. Under current law, X would report a $15 capital gain on the sale of the asset. However, because the sale was definite from the day of purchase, the House would consider the transaction to be not risky enough to deserve capital gains treatment - being too much like interest. The House would call the transaction a conversion transaction and treat a portion of the $15 profit as if it were ordinary income (but not as interest, according to the cryptic Ways and Means Committee print). The portion that would be treated as ordinary income would be the $100 asset acquisition price multiplied by 120% of some interest rate selected by the Treasury. As the proposal states: For example, assume that X purchases stock for $100 on January 1, 1994, and on that same day agrees to sell it to Y on January 1, 1996 for $115. Assume that the applicable rate is 5%. On January 1, 1996, X delivers the stock to Y in exchange for $115 in satisfaction of their agreement. Assume that under current law X would have recognized a capital gain of $15. Under the provision, $12.36 of that amount would be recharacterized as ordinary olicy to regard income (i.e., 120% of 5% e pariy to a compounded for two years, ary interest applied to an investment of es of the other $100).' trasaction as ,it is what the Petty criticisms of the example aside (e.g., anyone familiar with financial markets knows that they are not open on New Year's Day; If the futures trade were made the day after the purchase, would the 24 hours of risk let the taxpayer avoid the penalty? If the income is to be taxed as ordinary income because it resembles interest, why is it to be viewed not as interest? If it is to be viewed not as interest, why is the amount denied capital gains treatment set with reference to an interest rate?), does the proposal make sense? It does not. Consider the more sensible treatment of stock options which would be retained under the proposal. Asset sales resulting from the sale of options to buy, as opposed to firm commitments to buy, would not Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to inorming the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most