US Congress Makes Progress On Status Of Exchange Traded Instruments

Mike Godfrey, Tax-news.com, Washington

24 October 2000

Although the House last week passed HR 4541 'The Commodity Futures Modernization Act of 2000' by 377 votes to 4, and the legislation was received in the Senate on the same day, Exchange Traded Instruments will not receive 'mark-to-market' tax treatment until mid-2001, according to the Congress Joint Committee on Taxation.

The purpose of HR 4541, sponsored by Rep. Thomas Ewing, is stated to be: 'To reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-the-counter derivatives, and for other purposes.' Under the Act, exchange traded instruments (called 'securities futures contracts' by the legislation) will be given the same treatment as stock and stock option transactions, meaning that their tax treatment will follow along.

The bill defines a securities futures contract as a contract of sale for future delivery of a single security or a narrow-based security index. It would not be treated as a commodities futures contract for purposes of the Internal Revenue Code.

The Act will contain a requirement for the Treasury to issue detailed regulations, and until these appear (said to be by 1st July 2001), the Joint Committee on Taxation says that securities futures contracts would not be treated as section 1256 contracts. Thus they would not be subject to the mark-to-market rules of section 1256 and would not be eligible for 60-percent long-term capital gain treatment. Instead, gain or loss on the contracts would be recognized under the general rules relating to disposition of property.

Given the extreme pressure on time in the few days remaining to the 106th Congress, last week's attention given to HR 4541 seems to indicate that it will clear the Congress before it winds up for elections.

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