Inconsistencies, Imbalances, and the Taxation of Derivative Securities: An Agenda for Reform
Aggressive tax planning among high-income individuals and corporations represents a grave threat to the income tax, and that derivative securities are staples of this planning. While derivatives have many uses in tax planning, this article focuses on two features of our system that derivatives commonly exploit. First, different timing rules and rates apply to economically comparable derivatives such as options, forward contracts, swaps, and contingent debt as well as other financial transactions, a phenomenon that this article calls "inconsistency." Second, the government's share of potential losses on derivatives often exceeds its share of potential gains, a problem that this Article calls "imbalance".