On Thursday, January 24, Rep. Dave Camp (R-MI), chair of the House Committee on Ways and Means, released a discussion draft outlining potential changes to the taxes levied on financial products. The draft is the latest in the Committee’s work on tax reform; a release accompanying the draft notes that it held 20 hearings on the topic during the 112th Congress. An overview to the draft notes that the draft “makes significant changes to the way the United States taxes financial products.” In the release, Rep. Camp states that while the U.S. is a leader in the financial world, “our broken and antiquated tax code has failed to keep up with the rapid pace of financial innovation on Wall Street.” The draft focuses on six proposals. Among them: providing for the uniform tax treatment of financial derivatives, simplifying business hedging tax rules, eliminating any “phantom tax” from debt restructurings, and preventing the harvesting of tax losses on securities. The overview also makes the following points: • Financial institutions’ ability to disguise potentially significant risks through the use of derivatives and other financial products was “ a leading cause of the 2008 financial crisis.” At the same time, inconsistent tax rules concerning financial products has provided some investors with tax shelter opportunities, while placing tax burdens on others. • The draft would require taxpayers engaged in speculative financial activity—but not business hedging against common risks—to mark certain financial derivative products to fair market value at the end of each tax year, thus triggering the recognition of a gain or loss for tax purposes. Extending mark-to-market accounting treatment to derivatives (it’s already in place on some financial instruments) would provide consistency and limit opportunities for abuse, the overview notes. • Transactions that are treated as hedges for accounting purposes would be treated as hedges for tax purposes as well. • The draft would reform the “wash sale” rule, which is intended to prevent taxpayers from harvesting tax losses by selling securities at a loss and then reacquiring them. However, the rule is subject to abuse – namely, taxpayers sometimes skirt it by transacting with related parties, such as their spouses. The reform would address this. A summary of the draft provides more detail on the differences between current law and the proposed changes. The Committee is soliciting feedback on the draft. In particular, it notes several areas that the draft doesn’t address, including the valuation of derivatives that would become subject to mark-to-market tax treatment, and identifying tax provisions surrounding financial products that may become obsolete or require modification in light of the draft.