Moving from the Academic to the Legislative: House Ways & Means Committee Proposal Would Require Mark-to-Market for Derivatives and Modify Certain Other Tax Rules Applicable to Financial Instruments

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BACKGROUND -

For many years, academics have proposed that the U.S. replace the current hodge-podge U.S. federal income tax rules applicable to financial derivatives with a “mark-to-market” regime. In the first significant legislative initiative ever on this topic, Representative David Camp (R. MI), Chairman of the House Committee on Ways and Means, recently released a discussion draft containing proposed legislation to reform the taxation of financial instruments. If enacted, the legislation would apply to most financial instruments beginning January 1, 2014. Designed to be part of a package of comprehensive tax reform, the proposal, if adopted, would radically alter the current taxation of financial products.

Representative Camp styled the proposal as the antidote to the next financial crisis, “The U.S. is a leader in the financial world, but our broken and antiquated tax code has failed to keep up with the rapid pace of financial innovation on Wall Street. The lack of consistent and comprehensive tax policy has contributed to some corporate scandals and the recent financial crisis that devastated our economy and threatened our standing in the global community. Updating these tax rules to reflect modern developments in financial products will make the code simpler, fairer and more transparent for taxpayers; and it will also help to minimize the potential for abuse that has occurred in the past.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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