New Rules for Tax Treatment of Futures Contracts

December 26, 2000 ( - Effective immediately, gain or loss from a securities futures contract will be regarded as a gain or loss from a transaction in the underlying security.

The change in the tax treatment of securities futures contracts is part of the omnibus budget signed Thursday by President Clinton. The budget bill included the Community Renewal Tax Relief Act of 2000, which modifies the old 60/40 taxation rule.

For years, the proceeds from securities futures have been taxed as 40% short-term capital gain (or loss) and 60% long-term capital gain (or loss). Short-term gains are taxed at a higher rate than the rate for long-term gains. Under the new law, a loss on the short side of a securities futures contract, for example, generally will be 100% short-term gain or loss.

The 60/40 rule will still apply to a securities futures contract by a dealer in the normal course of a trade or business on a qualified board of trade or exchange.

The law gives the Treasury Department until July 1 to determine who is to be treated as a “dealer in securities” for this purpose.

In other tax-law news, the Internal Revenue Service has agreed to phase in the new reporting requirements for non-U.S. financial institutions in which U.S. taxpayers have overseas accounts. The new requirements had been intended to take effect Jan. 1.

The new system will continue to allow foreign financial institutions (known as qualified intermediaries) to obtain a reduced rate of U.S. tax withholding for their non-U.S. customers without having to disclose their identity to the IRS or to third parties, but it imposes for that privilege other withholding and reporting responsibilities in connection with their U.S. customers. Qualified intermediaries have complained of practical implementation difficulties and requested transition relief.

Accordingly, the IRS agreed to grant provisional qualified-intermediary status to institutions that apply by the end of this year. It proposes to work with those applicants over an indefinite period to overcome their practical difficulties until the originally contemplated system takes effect in full. .

By Christopher Faille, Reporter


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