Elective Taxation of Risk-Based Financial Instruments: A Proposal

Abstract

The current state of taxation of financial instruments is a mess. The rules are complicated, unfair, inconsistent, and patchwork; because Congress creates rules for new instruments in reaction to perceived abuses, there is no underlying policy or vision guiding the development of the rules.

This Article proposes a unified regime for taxing financial instruments, one that will not require further amendment to the Internal Revenue Code (the "Code") or to the Treasury regulations every time a new instrument is introduced, minimizes inefficiencies that lead to tax planning, and is simple to understand and implement.

Keywords: tax, financial instruments, derivatives, election, mark-to-market, risk-based