House Hearing on Mark-to-Market Taxation of Financial Products

At a March 20th hearing held by the House Ways Means Subcommittee on Select Revenue, a panel of tax academics, accountants, and tax policy advocates and practitioners addressed the concept of applying mark-to-market taxation to many financial products, as proposed in a draft tax reform proposal released by House Ways Means Chairman Dave Camp (R-Mich.) in January. The hearing was called to address technical issues raised by the financial products tax reform proposal that would, among other provisions, require most derivatives (except those used in certain hedging transactions) to be marked-to-market at the end of each tax year, repeal the 60/40 rule of Section 1256 with respect to such financial products so that all mark-to-market gain and losses would be ordinary, change the cancellation of debt rules with respect to debt restructurings, and modify the wash sale rule.

Subcommittee Chairman Pat Tiberi (R-Ohio) stated at the start of the hearing that modernization and simplification of the taxation of financial products was overdue. However, Tiberi also cautioned that such actions should only be done in the context of broader legislation that reduces tax rates. Tiberi said that neither he nor Chairman Camp would support these changes as an "one-off revenue raiser." Ranking Minority Subcommittee member Richard Neal (D-Mass.) generally endorsed the Camp proposal, noting that the taxation of financial products is a very important area of the tax law that is in need of reform. Neal warned, however, that this topic is not for the "faint of heart," that just explaining the different types of derivatives can fill volumes, and that the market is constantly evolving and growing.

Several of the witnesses suggested certain limitations and modifications to the proposal and expressed concerns as to the scope of the proposal and the valuation issues that were considered the linchpin to Camp's proposal. One witness, for example, questioned how taxpayers would be able to value derivatives that were not publicly traded, and how the IRS could audit such valuations. Other witnesses expressed concern that treatment of marked-to-market gains and losses as ordinary could result in character mismatches in which gains and losses on underlying securities were capital.

While the panel of witnesses called by Subcommittee Chairman Tibieri was generally supportive of the Camp proposal, other tax experts not called as witnesses at the March 20th hearing have expressed additional concerns.

See: Ways and Means Discussion Draft Bill; Technical Explanation of the Ways and Means Committee Discussion Draft Provisions to Reform the Taxation of Financial Instruments.See also: William Paul Testimony; David Garlock Testimony; Steve Rosenthal Testimony; Viva Hammer Testimony; Richard Neal Statement; Tiberi Opening Statement.