Wyden Bill Would Crack Down on Abuse of Complex Financial Contracts to Dodge Taxes

Wyden Bill Would Crack Down on Abuse of Complex Financial Contracts to Dodge Taxes

Bill Would Close Loopholes that Allow Wealthy Investors to Use Derivatives Contracts to Dodge Paying a Fair Share

Washington, D.C. - Senate Finance Committee Ranking Member Ron Wyden, D-Ore., today introduced legislation to close loopholes that allow wealthy investors to use derivatives contracts to dodge taxes on the underlying investments.

Derivatives are a financial bet that a stock or other investment will go up or down in value. Wealthy investors are able to exploit complex tax rules to make these bets risk-free by avoiding, deferring or minimizing paying tax. For example, a forward contract allows a wealthy investor to secure a low tax rate if they expect the underlying investment to gain significant value.

The Modernization of Derivatives Tax Act would require investors to annually pay tax on their gains or deduct their losses. Gains would be taxed at ordinary income rates, which is already the case for banks and securities dealers with respect to derivatives. This bill would also repeal nine tax code sections and revise many others, making the code less complex.

The Joint Committee on Taxation has previously estimated this bill would raise $16.5 billion over 10 years.

"This bill is about closing glaring loopholes that allow wealthy investors to get away with opting out of paying a fair share in taxes on profits from their bets on financial markets," Senator Wyden said. "Typical Americans who work for a living pay taxes on what they make every year, and that same basic principle ought to apply to rich investors too."

The legislative text of the bill is available here. A one-page summary is available here. A technical, section-by-section summary is available here.

###