Meanwhile investors who make long-term bets, are taxed at a much higher level. Hedge fund managers usually fit into the latter category.
For years, futures contracts... have received a more favorable tax treatment than stocks. A trader who buys and sells an oil contract in less than a year — even in a matter of minutes — pays no more than a 23 percent tax on the profits.
Compare that with the bill for flipping shares of Google , General Electric or even a diversified mutual fund in the same time period. Those short-term investment gains are treated like ordinary income, meaning the rate can run as high as 35 percent.
As Sorkin explains, the tax break on futures dates back to 1981, and was essentially a carrot handed to financiers who were lobbying against the closing of another tax avoidance method -—the "straddle transaction."
The straddle "allowed investors to roll over their profits into the next year. So a rule was written that forced traders to mark their positions to market and pay taxes on unrealized gains."
Of course traders didn't like this new rule, so lawmakers included a tax break to mollify them, in which future contracts were "taxed on a 60/40 basis, where 60 percent of the gains are taxed as long-term gains and 40 percent of the gains are taxed as short-term gains."
An economist at the Tax Policy Center told Sorkin that the tax break may "have made sense a generation ago when the market was mainly investors protecting their long-term profits. But with speculators betting on short-term price movements, the loophole is just that — a loophole."
This story originally appeared on Business Insider
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