The options exchanges and the three largest discount brokerages have launched a major lobbying effort in Washington to thwart moves by Congress and the Obama administration to tax unrealized gains and losses on options positions.
At the center of the storm is a tax proposal released by the House Ways and Means Committee in January known as the “financial products discussion draft.” At the same time, the administration has called for similar tax changes in its April 14 budget proposal for fiscal year 2014.
If enacted, the proposals “would radically change the tax treatment of listed options,” Ed Provost, Chicago Board Options Exchange’s chief business development officer, said Thursday at the options industry’s annual conference in Las Vegas.
The intent of the House proposal is to “modernize tax rules to minimize Wall Street’s ability to hide and disguise potentially significant risks through the abuse of derivatives and other novel financial products,” according to a House statement.
The proposal is sponsored by the Chairman of the Ways and Means Committee, Dave Camp (R-MI). It is part of a broader overhaul of the tax code that Camp is trying to put into effect.
If enacted, the proposals would be the first significant tax changes to hit the options industry since the 1970s, according to CBOE’s Provost.
CBOE is working with options industry lobbying group Securities Markets Coalition as well as Charles Schwab & Co., TD Ameritrade, and E*Trade to convince members of the Ways and Means Committee, their staffers, as well as Treasury and Administration official that the proposals are bad for retail investors.
The Securities Industry & Financial Markets Association is also lobbying members of Congress. Both SIFMA and the Coalition have submitted comment letters to the Ways and Means Committee over the proposal.
The Camp proposal would potentially increase the tax burden of options users by mandating that they mark their positions to market at the end of every year. Any gain or loss on the positions would then be taxed.
In addition, any gain or loss would be subject to ordinary income tax rates, rather than capital gains tax rates. Ordinary income rates tend to be higher than capital gains rates.
“These proposals have a ways to go before they become law, but we view them as serious threats,” Joe Corcoran, an official with the Coalition, said at the conference.
The Coalition has held over 25 meetings with members of the Ways and Means Committee, as well as their staffers, Corcoran said.
The executive is confident that his organization is getting its message across, and notes the Discussion document is “intentionally incomplete” because its drafters are eager to solicit feedback from affected parties.
The Coalition’s next step is to meet with Treasury and White House officials, Corcoran said.
