The Obama Administration’s 2010 budget, released on May 11, would repeal the “60/40 Tax Rule” according to an information circular sent out by the Chicago Board Options Exchange.
The rule is important to futures traders and options markets makers as it reduces their overall tax burden. Under the rule, 60% of trading profits for futures(and money earned by options market makers) are taxed as long-term capital gains, currently 15%, regardless of the holding period and 40% is taxed at ordinary rates. The top ordinary tax rate is 35% but is scheduled to go up to 39.6% in 2011.
“The 60/40 blended rate formula was enacted 25 years ago to compensate market makers who were subject to mark to market requirements and, thus, were required to include as income any gains and losses on options at year’s end, regardless of whether the had been actually realized,” noted CBOE Chairman Bill Brodsky in the circular.
The rule is an important advantage for futures trading and was a regulatory sticking point between the Commodity Futures Trading Commission and Securities and Exchange Commission in their work on creating rules for single stock futures.