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

Andrew Ross Sorkin of the New York Times interviewed me about the history and future status of lower 60/40 tax rates. Read his article “An Addition to the List of Tax Loopholes” published July 11.

Mr. Sorkin quoted me and used some content from a draft version of this blog, which I sent to him while he worked on his article. While our articles are similar in content, we reach an opposite conclusion. Mr. Sorkin suggested adding 60/40 futures tax rates to the list of tax loopholes being bandied about by the President and Democrats in connection with the contentious debt-ceiling debate. Conversely, I’m in the Republican camp on taxes — I don’t want tax hikes now, but I support meaningful tax reform efforts.

Mr. Sorkin told me that some in Congress are looking at the Section 1256 60/40 tax rates, which implies to me they are thinking about getting rid of them. He mentioned 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 receive the 60 percent long-term capital gains benefit? The remaining 40 percent is subject to short-term capital gains rates — the higher ordinary income tax rates. Why should futures traders and commodities exchanges enjoy this tax break, when securities traders and exchanges don’t?

The President has his sights 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 commodities exchanges and futures traders on that list too?

The President’s Deficit Commission recommends tax reform, simplifying the tax code and repealing many special tax breaks. It suggests one reduced tax rate applied to all types of income, not distinguishing between ordinary and long-term capital gains. This would mean a repeal of 60/40 tax breaks. But, the Deficit Commission’s 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...

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