A Structural Critique of Trader Taxation
56 Pages Posted: 31 Jul 2010
Date Written: July 19, 2008
This article scrutinizes the structural elements underlying the unusual tax treatment of securities traders under current law. After summarizing the distinguishing features of trader taxation, this article explains how the treatment of securities traders today has occurred due to a long-standing, legislatively created disjuncture at the point where the “to customers” requirement in the capital asset rules (i.e., the requirement that traders must sell “to customers” in order to escape capital asset classification and court findings that they do not) and the “trade or business” concept intersect. The article reviews some of the traditional critiques that have been levied against trader taxation, and develops some new structural criticisms grounded in contemporary exigencies. The article further argues that restrictive court interpretations of the “to customers” requirement and the legislative creation of an elective “mark-to-market” regime for securities traders in effect constitute a de facto repeal of (or, at the very least, a minimization of the impact of) the “to customers” requirement in the capital asset statute. This article concludes that the “to customers” requirement should be eliminated and a different approach should be taken toward taxing traders.
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