Exchange-traded notes to lose tax edge in House proposal

‘Larger Project’

“We understand that this is part of a larger project, tax reform project, which we generally support,” he said. “We know there are other pieces of this, so we don’t want to lose the forest for the trees.”

The largest U.S. banks would be unaffected, at least when it comes to their own holdings. Current tax law already requires them to mark their derivative portfolios to market annually.

Among the most straightforward calculations is the effect on exchange-traded notes. The securities, issued by companies such as Barclays Plc and JPMorgan Chase & Co., are derivatives whose value is tied to another investment, such as a stock market index.

Holders of assets that generate dividends and capital gains must pay taxes in the year those are received. By contrast, an ETN doesn’t generate such income, and holders don’t have to pay taxes until they sell the note.

Establishing Parity

Camp, a Michigan Republican and chairman of the Ways and Means Committee in the House of Representatives, wants to change that and establish parity between derivatives and other investments.

A 2011 report from Congress’s Joint Committee on Taxation showed how investors can take advantage of the variable tax treatment of different financial instruments to obtain the lowest tax rates on gains and the greatest benefit from losses.

Camp’s plan would reduce the alternatives for investors, said David Shapiro, a principal at PricewaterhouseCoopers LLP in Washington. They could own ordinary assets, which would mean taxes only upon the sale and capital gains rates. Or they could own derivatives, which would mean mark-to-market accounting and ordinary income taxation each year.

“This proposal is essentially taking some of those choices off the menu,” said Shapiro, who was senior counsel for financial products at the Treasury Department from 2007 to 2009. “But it’s also keeping the fundamental choice there.”

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