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 âlooking at thisâ 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 donât? The President has his sites on tax expenditures and special tax breaks for âthose that can afford itâ 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 Presidentâs 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 â to flatten the tax code so rates can be reduced â but business traders would still be able to keep their business tax deductions. Although, the Deficit Commission didnât 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 wonât budge on tax hikes unless itâs 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 Greenâs 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. â¢ 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. â¢ 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 âhow can commodities traders ever get a long-term capital gains rate - which requires a 12-month holding period â if they have to mark to market before year-endâ? 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, itâs never that simple when it comes to analyzing taxes. Broaden the picture and itâs 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. Thereâs 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. Thatâs not much of a rate reduction and it will represent a huge tax hike for futures traders.