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U.S. Securities Markets Coalition Opposes Senator Wyden’s “Modernization of Derivatives Tax Act of 2017”

Traders Magazine Online News, December 6, 2017

John D'Antona Jr.

The members of the U.S. Securities Markets Coalition (the “Coalition”)1 write to share our opposition to Senator Wyden’s filed amendment (Wyden #11, Committee #155) to the Chairman’s Mark of the Tax Cuts and Jobs Act2 that would add the language of his proposed Modernization of Derivatives Tax Act of 2017 (“MODA 2017”).

The Coalition has previously shared its views with the Committee and with Senator Wyden that while we applaud Senator Wyden’s stated interest in “radically simplifying” the tax code to create “a simpler, more straightforward tax regime,”3 we respectfully believe that MODA 2017 would not advance this objective, but instead would create results that are neither simple, nor straightforward, nor fair, as applied to exchange-traded (i.e., listed) options.

Options have been traded on national securities exchanges in the U.S. for over 40 years, and the basic tax rules for exchange-traded options continue to work well for our millions of customers, and for the country as a whole. The Coalition believes that it is far better to “modernize” the taxation of derivatives, by identifying those specific areas where the rules fall short, and by providing limited guidance and reform in those specific areas. If Congress deems broad reform to be necessary, we strongly urge that exchange-traded options be excluded from the types of derivatives to which MODA 2017 would apply. Currently, the tax treatment of exchange-traded options is governed by well-established rules that are relatively simple and easy to understand. These rules were summarized in Revenue Ruling 78-182, not long after options first traded on a national securities exchange. These rules have worked well for decades, and we are aware of no significant concerns or uncertainties in their application. The fact that the rules are old, is no argument for replacing them, particularly when the options to which they apply are essentially the same as when the rules were promulgated. In this regard, exchange-traded options are not new or exotic instruments with troubling tax characteristics. All major tax policy goals – simplicity, fairness, efficiency and administrability – support retention of the current-law treatment of exchange-traded options over the approach set forth in MODA 2017.

Broad-brush reform of the nature represented by MODA 2017 will create new, untold complexities, while at the same time, generating unfair results in many circumstances with regard to exchange-traded options.

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