CBOE, peers decry tax change

(Crain’s) — A federal budget proposal to repeal a longstanding tax break for professional traders would boost costs for investors and damage financial markets, Chicago Board Options Exchange Chairman William Brodsky and his counterparts at all six rival U.S. options exchanges told a key lawmaker in a letter.

Market makers stand ready to buy when investors want to sell and to sell when investors want to buy, providing liquidity in tens of thousands of options contracts. Under current law, market makers pay the lower capital gains tax rate on 60% of their profits and the higher personal income tax rate on the remaining 40%. The split tax rate, on the books since the 1980s, was designed to offset the effects of new accounting rules that required taxes to be paid on all end-of-year paper profits, regardless of whether the profits had been realized.

A repeal of the so-called 60-40 tax scheme would effectively raise taxes on market makers by 72%, the letter said.

“We are concerned that this increase in the tax burden will cause some of our market makers to abandon the vital role of market-making altogether,” according to the letter, which was sent to Ways and Means Committee Chairman Charles Rangel, D-N.Y. “Their departure will diminish liquidity and depth on the U.S. options markets and will increase the cost of hedging stock positions for individual investors and mutual and pension fund managers.”