Obama’s Budget Hits Commodities And Options Dealers With Surprise Tax Hike

Perhaps the most surprising aspect of the budget details released yesterday by the Obama administration is a huge tax hike on commodities and options dealers that is expected to suck $4.2 billion out of dealers income and into government coffers.

The budget proposal, which falls on page 110 of the “green paper” released by the administration yesterday, would tax option and commodity dealer income as ordinary income. Currently, most income earned by dealers is taxed at the lower capital gains tax rate.

Until now, commodities and options dealers have enjoyed a special tax provision that allows them to pay capital gains rates on the first 60 cents of every dollar and ordinary income taxes on the rest. The law was sponsored by then-Chicago Congressman Dan Rostenkowski, and approved as part of the Reagan era tax-cutting. It was a pretty obvious gift to Rostenkowski’s Chicago dealer and trader constituents.

It will actually be a double tax hit for commodities and options dealers, since Obama is also planning to raise the top marginal rate to 39 per cent.  That’s a huge increase from the 23% top marginal rate created by the combined tax system.

“There is no reason to treat dealers in commodities, commodities derivatives dealers, dealers in securities and dealers in equity options differently than dealers in other types of property. Dealers earn their income from their day-to-day dealing activities and should be taxed at ordinary rates.” the proposal said in a section titled “Reasons for Change.”

Sources say that many commodities dealers have been caught completely off-guard by this proposed change.
“The usual suspects and trade associations were blindsided,” an industry insider said. “They did not see this coming despite its remarkable resemblance to the hedge fund tax debate from a couple of years ago.”

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