Traders Need Fair Tax Reform

August 7, 2017 | By: Robert A. Green, CPA

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A Tax Reform Wish List For Traders

Dear U.S. Senate, House of Representatives, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn:

As you deliberate on tax reform, I ask that you consider the needs of traders.

There are hundreds of thousands of small-business traders around the country and probably tens of thousands in your state. Traders provide for their families and pay billions in taxes. One of the brightest stars of the economy is America’s financial market, and as market makers providing liquidity, traders earn their share of America’s success.

Here’s a prioritized list of traders’ needs in tax reform:

• Trader tax status: The tax cornerstone is “trader tax status” (TTS), which delivers business expense treatment. To be eligible for TTS, a trader needs about four trades per day, four days per week with holding periods under 31 days. There are other factors explained in IRS Pub. 550. Please safeguard trading business expenses.

• Section 475 MTM: In 1997, Congress expanded Section 475 to traders in securities and commodities. Use of Section 475 requires eligibility for TTS. MTM (mark-to-market accounting) imputes sales of open positions at year-end, so the taxpayer reports realized and unrealized gains and losses. MTM is the epitome of “tax simplification,” doing away with complicated rules for wash sale loss adjustments, straddles losses, and tax deferral. Also, Section 475 trades are exempt from the $3,000 capital loss limitation against other income. Please safeguard the use of Section 475 MTM for TTS traders, make it easier to elect, and apply it to most financial instruments.

• Section 1256 MTM: Futures and other Section 1256 contracts are subject to MTM reporting with lower 60/40 tax rates. Section 1256 does not require TTS or an election; all investors use it by default. I ask that you consider bringing more financial instruments into Section 1256 MTM and safeguard this code section in tax reform.

• Lower tax rate on business income: One of the most significant tax reform proposals is a lower tax rate on “business income,” applied to corporations and pass-through entities (PTE). It’s vital to include PTE as most small businesses operate as a PTE. Please prevent discrimination against a trading business PTE with TTS and Section 475 MTM ordinary income; it deserves the lower tax rate on business income just like other small businesses.

• Lower tax rate on investment income: Tax reform proposals include a lower tax rate on investment income. Alternatively, the House proposed a 50% exclusion of investment income taxed at ordinary rates. These proposals include all capital gains, dividends, and interest income. Current law limits a lower capital gains tax rate to long-term capital gains and qualified dividends. Please support extending the lower rate or 50% exclusion to all capital gains.

• Net operating losses (NOLs): One tax reform proposal repeals the two-year NOL carryback, retaining the 20-year NOL carry forward. Please don’t support this change as it defeats the primary purpose of NOL law. When a small business incurs a substantial loss generating an NOL, the business is likely dependent on a quick NOL carryback tax refund to replenish itself and retain its employees.

• Cost-basis reporting: In 2011, Congress implemented cost-basis reporting rules, beefing up broker 1099Bs to include cost basis and holding period information on securities. But, there’s a problem: IRS wash-sale loss adjustment rules for brokers differ from rules for taxpayers. (Wash sale definition: If a taxpayer buys back a losing position 30 days before or after, the IRS wants the tax loss deferred to the replacement position.) Most taxpayers and their tax preparers are not compliant with taxpayer rules; they cut corners relying on broker 1099Bs. One way to alleviate this problem is for Congress to expand the use of Section 475 MTM and Section 1256 MTM, which exempts those trades from wash sale loss adjustments.

Traders support tax reform legislation, and they respectfully request your consideration of these important issues that will affect their small businesses.

Thank you for your time.

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