Senator Ron Wyden (D-OR) introduced a draft bill that would amend the Internal Revenue Code to revise the tax treatment of derivatives and their underlying investments, among other purposes.
The draft bill titled "Modernization of Derivatives Tax Act of 2016" ("MODA") would:
- require mark to market and ordinary tax treatment for all derivatives, treating these contracts as though they had been sold and repurchased at the end of each year and consequently, require ordinary tax treatment on the resulting gains and losses;
- simplify the tax rules for financial products by replacing "inconsistent" tax rules and applying a single tax regime to all derivative contracts, including a single set of respective rules for (i) transaction timing (mark to market), (ii) character (ordinary), and (iii) source (taxpayer's country of residence);
- identify and tax substantial hedges on capital assets by installing a capital hedging rule to require mark to market and ordinary income tax treatment for combinations of derivatives and their underlying investments that have been identified as having a substantial hedging relationship; and
- target "tax avoiders" and "spare taxpayers" that are hedging risks while trying to comply with a complex code by now aiming at the "sliver of sophisticated taxpayers who use derivatives to avoid paying taxes on their investments."
Senator Wyden noted that MODA would strike nine code sections (Sections 1233, 1234, 1234A, 1234B, 1236, 1256, 1258, 1259 and 1260) and "streamline many others." He also highlighted that, according to the Joint Committee on Taxation, MODA would raise $16.5 billion over ten years.
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