Are lower 60/40 tax rates on futures in jeopardy of repeal?

Discussion in 'Wall St. News' started by Robert A. Green, Jul 11, 2011.

  1. This will be edited tonight on my blog.

    I was just contacted by one of the most well-known and respected business reporters in print and TV media. He interviewed me about the history and potential future status of lower 60/40 tax rates. He had listened to our prior podcasts and Webinars on the topic.

    This reporter told me that some in Congress are “looking at this” which implies to me they are considering this tax break for the chopping block. He also mentioned that they saw a recent CFTC report which showed that 80 percent of trading volumes on commodities exchanges are short-term trading. Which begs question, why do futures traders get credited with the 60 percent long-term capital gains benefit? The other 40 percent of 60/40 is short-term capital gains rates, which are the higher-ordinary income tax rates. After all, why should futures traders and commodities exchanges enjoy this tax break, when securities traders and exchanges don’t?

    The President has his sites on tax expenditures and special tax breaks for “those that can afford it” including hedge fund managers, oil companies and private-jet manufacturers. Is the President going to include on that list commodities exchanges and futures traders from his home state of Illinois too?

    The President’s Deficit Commission recommends tax reform, simplifying the tax code and repealing many special tax breaks. They suggest one reduced tax rate applied to all types of income, not distinguishing between ordinary income and long-term capital gains. This has the effect of repealing 60/40 tax breaks too. But, the Deficit Commission recommendations overall are good for traders because the Commission suggests a top-marginal tax rate of 23 percent, which is the current 60/40 top-blended tax rate now. In effect, securities traders could get a tax cut, using the same tax rate that futures traders use now. Yes, investors would lose many itemized deductions – to flatten the tax code so rates can be reduced – but business traders would still be able to keep their business tax deductions. Although, the Deficit Commission didn’t gain much traction to start, it seems to be getting its rightful consideration now as part of the intense debt ceiling and deficit stand-off.

    Republicans say they won’t budge on tax hikes unless it’s part of Deficit Commission-style tax reform, with corresponding rate reduction. Will 60/40 tax breaks face the chopping block too in that debate?

    President Obama included repeal of lower 60/40 tax rates for dealers-only (not traders) in his last two budgets. To date, Congress did not include those provisions in any tax bill and it has not been enacted. I covered this on my blog in 2009. May 12 09 - New potential attack on 60/40 treatment for dealers .

    Back to this big time reporter. After our call, I sent him Green’s 2011 Trader Tax Guide and included this note. He may be leaning towards thinking futures traders are getting a special hard-to-defend tax break.

    • Fairly speaking - and I have said this on our Webinars and podcasts - I don't see how President Obama can justify keeping lower 60/40 tax rates to benefit futures traders and commodities exchanges in his home state, while pushing hard to raise taxes on securities hedge fund managers - often in CT and NYC. Many securities hedge fund managers don't get carried interest tax breaks with lower 15% long-term capital gains tax rates because they mostly generate short-term capital gains taxed at higher-ordinary tax rates.

    • I think you may be on to a firestorm of a story here and could be witnessing the first preparations for a broadside against lower 60/40 tax rates for futures traders. It will be very interesting to see the politics on this one as they are counter-intuitive with this tax break being a little to close to Chicago-land's Democratic stronghold.

    I told the reporter the history of how 60/40 came about.
    In the 1980s, when President Reagan initiated major tax reform to reduce sky-high tax rates down to reasonable levels, it was a similar debate and trade-off as today. Repeal tax expenditures and tax shelters as a trade-off to lower tax rates. Professional commodities traders were gaming/avoiding the tax system badly. They put on long and short trades at the same time and closed out - realized for tax purposes - losing trades before tax-year-end, while deferring profitable trades and related taxes to subsequent years. Many of them never paid taxes ever and yet made a fortune.

    Congress said the jig was up and they had to use mark-to-market (MTM) accounting, an economic system to report both realized and unrealized gains and losses at year-end. Chairman of Ways & Means Dan Rostenkowski (D-IL) saved the say for his local commodities traders and campaign contributors. Rostenkowski cried foul ‘how can commodities traders ever get a long-term capital gains rate - which requires a 12-month holding period – if they have to mark to market before year-end’? In that case, every trade is short-term and taxed at higher ordinary income tax rates. The horse trading commenced and no one was better at it than Rostenkowski. Traders probably had 80 percent short term trading then the CFTC report says they do now, so it should have been an 80/20 blended rate, with 80 percent short-term. Rostenkowski negotiated 60 percent long-term for his loyal constituents.

    But, it’s never that simple when it comes to analyzing taxes. Broaden the picture and it’s less of a win for those local professional commodities traders. Futures traders with memberships on futures or options exchanges are subject to self-employment taxes (social security and Medicare) on their trading gains too (Section 1402i). All other types of traders are exempt from SE taxes.

    Here's my strategy as advocate for traders in our Traders Association. There’s no use in trying to ignore the hard-to-defend tax breaks for futures traders. I would rather pin that tail on the Democratic-donkey and put the Democrats on a potential hypocritical attack on carried interest and the Bush tax cuts for the upper-income.

    In the end, I like Deficit Commission tax reform ideas with a low 23 percent rate for everyone and business tax deductions safeguarded.

    What I fear is that the President will seek to repeal many tax breaks as a trade-off for keeping the Bush-era tax rates on the upper-income. That’s not much of a rate reduction and it will represent a huge tax hike for futures traders.
  2. "...Which begs question, why do futures traders get credited with the 60 percent long-term capital gains benefit? The other 40 percent of 60/40 is short-term capital gains rates, which are the higher-ordinary income tax rates. After all, why should futures traders and commodities exchanges enjoy this tax break, when securities traders and exchanges don t?"

    Even most futures traders that hold long-term much like long-term securities trades can't help but roll over every 3 months.

    If it's all about fairness, maybe securities should also receive the 60/40. Or better, get rid of short-term rates. Capital gains should not be taxed as income no matter how long they are held as the short-term trades process supports the long-term trades.

    Proposed top rate of 23pc sounds good and might last for a while, only to be easily increased later with no more 60/40 and other breaks. Tax rates will easily go up eventually. It's a trust issue.
  3. foo


    I think a better question is why is investment taxed at all?

    Fair---who said everything has to be fair?.....

    Investment built our country.
    An Addition to the List of Tax Loopholes

    Pablo Martinez Monsivais/Associated Press
    President Obama at his news briefing on Monday on the nation’s deficit. Mr. Obama has called for ending a variety of tax loopholes.

    Notice how Andrew Ross Sorkin's article is very similar to the draft blog I sent him. Nice to be quoted in the same story with Buffett being quoted too.


    .....When I called Robert Green, a tax specialist whose clients include traders on the Chicago Mercantile Exchange, the hub of commodities futures contracts, he seemed genuinely taken aback.

    “I’ve been dreading getting a call like this,” he said, apparently worried that any publicity of the tax break could put pressure on lawmakers to revisit the rule. “No one has shot something across the bow.”

    Still, he acknowledged that it would be hard for President Obama to justify lower tax rates “to benefit futures traders and commodities exchanges in his home state, while pushing hard to raise taxes on securities hedge fund managers — often in Connecticut and New York City.”
  5. Robert Green, I respect and admire your work. However, on this issue I disagree, I do not see how giving AR Sorkin an interview and encouraigng further publicity on this issue benefits traders.

    After the allure of being quoted in the NYT wears off, what else is your benefit?

  6. Agree, tricky decision. Sorkin did not say what his opinion was when he called me and he just asked me some technical questions about 60/40, the history and future.

    He would have gotten the answers from someone else and run the same story. I spun it a little in our favor I think.

    I wrote him tonight. Let's see if Obama takes your bait, putting 60/40 breaks on let's-embarrass-the-Republicans list of unjust loopholes. If he doesn't, what does that tell you?

    I think Obama won't take the bait to upset Chicago exchanges and politicians and that puts him into a hypocritical defensive posture.

    I really hope that Democrats embrace the low 20ish tax rates for major tax reform.

    I did duck the Voice of America interview on FTT, and they ran a story that did pick up some of my anti-FTT points.

    Sometimes I use my gut instincts on this advocacy and I think its working so far.

    Thanks for your support, constructive positive criticism and more.
  7. heech


    I don't think that Green deserves any criticism for talking about the issue. It's inevitable this would come about.

    Firstly, it was nice while it lasted. But secondly, never underestimate the financial industry's political power... Everyone said carried interest was inevitably dead last year, but it made a miraculous recovery. It may yet die in the new series of cuts, but I'll believe it when I see it.

    Don't forget as well Jon Corzine is now head at MF Global. Even more political power in the futures industry.
  8. BSAM


    Silence! Your good government doesn't want to hear this. Now let the past stay there and no more foolish talk, huh?:p
  9. Again, Mr, Green, I've always admired your work for a long time and on this one I disagree.

    As for AR Sorkin, of course he would spin it against's the NY Times not the WSJ!!!

    I agree with you we need MAJOR overall tax reform. Promises of 10/15 year rolling spending cuts (that will never manifest) in exchange for ANY kind of tax hike or tax loophome removal in the present is a bad deal. Sadly both parties are incompetent and lack courage.

    The ideal solution would be NOT to raise the debt imit, enact MAJOR spending cuts TODAY, and enact major overall tax reform a la Fair Tax or a Flat Tax (with inbuilt protections against future increases of today's "flat" rate.

    One thing I've learnt is that the public thinks that EVERY "speculator" or "trader" is a millionaire or billionaire. Of course, we know this is not true. We need to fight against this misperception

  10. Thanks for your comments and help.

    I worked more on my blog and it's in editing now. I vigorously defend traders and defend futures tax rates from repeal. I argue that all business traders should have 60/40.

    I clearly show that I reach the opposite conclusion from Sorkin of the NYT. It should post on our site and Forbes later today. Hope you like it.
    #10     Jul 12, 2011