Option traders on front lines in battle to retain 60/40 tax treatment

The preferential 60/40 tax treatment for options market makers -- the rule that taxes 60% of profit income at the capital gains tax rate and the other 40% at the ordinary rate -- is again being targeted by those in power as a potential revenue stream. The proposal showed up in the Obama administration's 2011 budget. Its repeal would reportedly raise $2.6 billion in taxes over the next decade.

The trading industry has defeated repeals in the past, including one last year and in 2003, when the Senate was on the verge of nixing the rule. Then, as they are doing now, industry representatives argued that eliminating the 60/40 tax treatment would hurt U.S. markets.

Here's a history lesson: The 60/40 rule dates to 1981 when derivatives market makers were first allowed to take advantage of the rule. The rule's major proponent at the time was then-Rep. Dan Rostenkowski (D- Ill.).

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