Anyone know why futures get special tax rates?

Discussion in 'Taxes and Accounting' started by AshanD, Dec 24, 2007.

  1. AshanD


    Anyone know the reason for why futures get the significant 60/40 blended rates?

    I thought of a few ideas:

    -Futures contracts are continuously cycled so that buying and selling contracts is necessary (but then why not require a minimum holding period?

    -Futures are used by the commercials to hedge risks

    -Some sort of political motivation? I read that Hilary Clinton made huge (and questionable) returns shorting cattle futures during a bull market. So maybe futures are a favorite of politicians and their friends. Or big oil (and other industries) wants heavy speculation to go on and the tax incentives fuel people to get into the futures markets.
  2. most likely political
    cme probably lobbied for it, paid a lot of lobbiers, etc..
  3. EricP


    It was something that Dan Rostenkowsi was able to push through for the benefit of his Chicago district while he was an influential member of congress.

    "This 60/40 tax treatment is the result of a special deal brokered by former House Ways & Means Committee Chairman Dan Rostenkowski of Chicago. Even after he went to jail for stealing postage stamps from his Congressional office, “Rosty’s” deal still stands. The law greatly favors profitable traders using U.S. futures exchanges."
  4. Didn't this come about due to the infamous Hunt brothers cornering the silver market in the late 70s?
  5. Her broker used a mirror account and transferred the profitable trades to her account, leaving the unprofitable trades in another account.
    Even the best traders in the world could not turn $1,000 into $100,000 in 10 months of trading.

    A study was done to find the odds of such returns, and a study by Anderson and Jackson (1994) found the odds were 1 in 31 trillion.
    Leo Melamed, former CME chairman, said in 1996 that it was very likely that someone else made the trades and then they were shifted to her account.
  6. The futures tax code that 1986 replaced was much better. One could roll their "unrealized" gains perpetually.

    People (like the dummy who wrote the article you linked) miss the obvious. Yea, it's a decent code for short term traders (as if one need feel blessed to only be in a 26% Federal bracket)but long term holders of a position pay a higher rate than if taxed at 100% capital gains.
  7. mss


    This is my understanding of the background for the 60/40 treatment.

    Prior to 1981, an individual who had large capital gains from, say, the sale of his or her business would be approached by brokerage firms with a technique for shifting the taxation on the capital gain indefinitely into the future.

    If the individual agreed, the firm would arrange for him or her to take a long and a short position in volatile, non-identical but correlated futures contracts (perhaps commodity contracts for different months).

    After a short period of time the unrealized loss on one of the contracts, would be enough to fully offset the gain from the independent transaction.

    The losing transaction would be closed out to generate a capital loss to offset against the independent gain.

    The winning transaction would immediately be hedged and would then be carried forward to next year.

    Next year, they might or might not engage in a similar transaction to defer the gain another year.

    In 1981, Congress and President Reagan dealt with this by requiring mark to market treatment for many futures contracts.

    Mark to market messes up the traditional realization and holding period rules so they just made up the 60/40 rule to deal in some way with that problem.

  8. smithi


    The question is a little silly.
    That would be like askig
    why capital gain taxes are lower or
    why home owners don't have to pay taxes on the first few hundred thousands of cap gain

    The answer is because this country does not have flat tax system