Ways and Means "Discussion Draft" proposes major changes to taxation of financial products

Washington National Tax Services

The House Ways and Means Committee on January 24 released a "Discussion Draft" of a bill to reform the taxation of financial products. Following a comment period (for which no deadline has been set), a revised version of the Discussion Draft is expected to be considered later this year by the Ways and Means Committee as part of a comprehensive tax reform bill, addressing individual, corporate, and international tax provisions.

The Discussion Draft proposals would most significantly impact taxpayers that execute financial transactions as part of a trading or investment strategy, such as hedge funds, mutual funds, and individual investors/traders. Specifically:

  • An investor/trader would be required to mark-to-market on an annual basis all "derivatives" (broadly defined) in the taxpayer's portfolio. The resulting income or loss would be ordinary.
  • A taxpayer no longer could specifically identify by "lot" the security that it sells for purposes of determining cost basis. Instead, the proposal requires that cost basis be computed under an "average cost" methodology.
  • Taxpayers would be required to accrue market discount into income on a current basis.


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