While finalized and pending tax initiatives have been promoted as ways to simplify the U.S. tax system, eliminate current loopholes and raise revenue for the U.S. government, the potential impact of these regulations on the U.S. listed options market may be problematic, says TABB Group in new research, “Unintended Consequences: Tax Regulations and the US Listed Options Market,” that delves into these repercussions.
According to TABB, one recently passed tax regulation and two pending tax proposals could wreak havoc on the U.S. listed options market through trading restrictions and limitations on how customers can use options to implement investment strategies and manage risk.
In addition, the new tax proposals raise the level of complexity for investors using options, resulting in more onerous regulatory and compliance burdens while at the same time imposing new tax liabilities for institutional and retail investors.
“These rules ultimately punish investors who have been using listed options as part of exposure management strategies and will result in lower trading volumes. This will have negative impacts on all industry participants,” explains report author and TABB analystCallie Bost.
TABB’s research finds that the Department of Labor’s fiduciary proposal will result in many brokers being classified as fiduciaries, drastically impacting revenue models and prohibiting them from facilitating listed options trades in specific accounts.
The Camp Proposal is also identified as having substantial negative implications for investors, as it will trigger immediate tax liabilities if it were implemented.
Bost also notes that Section 871(m) of the Internal Revenue Code, already finalized, will impose withholding tax on foreign investors who trade or hold certain derivatives on U.S. securities around dividend payment dates.
“Although the industry is working to determine which proposals and regulations will impact the market and how, the challenge moving forward will be to continue to flag concerns and the unintended negative consequences to the decision makers in Washington,” says Bost.
The 12-page, 4-exhibit report is available for download by TABB Group Derivatives clients and pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the report, contact info@tabbgroup.com.
