What Will Tax Reform Mean for Options?

OCC Educating Lawmakers on Potential Impact on Tax Reform on Listed Equity Options Market

By Craig Donohue, OCC Executive Chairman and CEO

March 16, 2017

Last November’s national election results brought dramatic change to Washington, D.C., not only in the White House, but also on Capitol Hill. One of the areas that OCC and the U.S. Securities Markets Coalition has been paying close attention to is the issue of comprehensive tax reform and its potential impact on the U.S. listed equity options markets.

Over the past three years, policymakers from both parties have proposed a variety of financial product tax reform proposals that could impact listed equity options and other derivatives. These proposals could make the use of listed equity options much less attractive to market participants than under current law.

Since the election, both President Trump and Members of Congress leading the congressional tax committees have indicated that tax reform is a priority for 2017, and proposals are being drafted to ensure early introduction of bills to reform the tax code. House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Finance Committee Chairman Orrin Hatch (R-UT) will be leading congressional consideration of tax proposals in the 115th Congress. OCC and the Coalition continue to meet with Members of Congress and staff of these committees to reiterate our deep concerns on behalf of the options market about the previous proposals, on which we submitted extensive comments and held many meetings.

While the House Republican blueprint for tax reform does not include mention of specific proposals that would impact listed equity options, it is likely that legislators and staff will refer back to prior financial products tax proposals drafted by former House Ways and Means Committee Chairman Dave Camp (R-MI) or current Senate Finance Committee Ranking Democrat Ron Wyden (D-OR).

These proposals would treat all listed equity options as sold at the end of the year, treat appreciated stock as sold if a taxpayer enters into an option to manage risk associated with owning the stock, and radically alter the tax treatment of stock while a related option position is outstanding. Enacting these proposals would adversely affect individuals and other taxpayers using listed equity options to manage risks associated with investments in publicly traded stocks. It would discourage use of options – distorting rational economic and risk management decision-making and replacing the well-established and relatively simple tax rules for listed equity options with a burdensome and overly complicated regime.

In addition to the broader efforts being spearheaded by Chairmen Brady and Hatch, Congressman Tom Reed (R-NY), a member of the Ways and Means Committee, is leading the development of a financial products draft. OCC and the Coalition are working with Congressman Reed and his staff to explain the issues raised by previous financial product tax proposals and to advocate for a different approach in the forthcoming package.

OCC understands the importance of these issues to our participating exchanges, clearing firms, and market participants. We remain committed to working with the Coalition to educate key Members of Congress on the importance of having a viable U.S. listed equity options market that functions efficiently and effectively on behalf of investors.

To learn more about OCC’s thought leadership on industry issues, visit OCC’s Blog.

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