The House Subcommittee on Select Revenue Measures held a hearing to examine whether there is a need for a more uniform treatment of various derivative structures.
Committee Chairman Richard Neal (pictured), D-Mass., pointed out the pitfalls of derivatives, noting the financial damage to the market last Friday after one insurer posted heavy losses, in part due to one type of derivative, credit default swaps.
"Complexity is the name of the game in the derivatives market," he said in his opening statement. "But I believe it is important for Congress to understand how this market operates and for this committee to understand how these products are taxed. ... I believe we set up inherent conflicts when derivatives enjoy a better tax treatment than the underlying asset."
The first part of the hearing concentrated on the broader issue of derivatives, while the second part focused on one type of derivative: prepaid forward contracts. The Treasury Department issued a notice and began soliciting public comments on them last December.
"Because of the large number of taxpayers potentially affected and their relative level of sophistication, the migration of prepaid forward contracts into the portfolios of retail investors served as an occasion for us to revisit the core issue related to prepaid forward contracts - whether or not a current accrual of income should be required," said Michael Desmond, a tax legislative counsel with the Treasury Department, in his prepared testimony.
