Perils of Partial Mark-to-Market Taxation

36 Pages Posted: 20 Aug 2013 Last revised: 23 Oct 2013

Date Written: August 20, 2013


As part of its proposal for comprehensive tax reform, the House Ways and Means Committee has suggested mark-to-market taxation for derivatives, but apparently not for the underlying assets. Such a partial mark-to-market system would create opportunities for investors to have negative effective tax rates and thereby extract billions of dollars from the U.S. Treasury on an annual basis. I explain the nature of such strategies, develop the underlying theory, and provide specific empirical examples of how they would have worked if the proposed regime had been in place historically. I also describe revisions to the reform proposal that would address the concerns that I raise. In light of my findings, I suggest that Congress either abandon or substantially revise the current proposal.

Keywords: financial products taxation, derivatives taxation, mark-to-market taxation, fundamental tax reform, tax arbitrage

JEL Classification: G10, G18, K34

Suggested Citation

Brennan, Thomas J., Perils of Partial Mark-to-Market Taxation (August 20, 2013). Northwestern Law & Econ Research Paper No. 13-34, Available at SSRN: or

Thomas J. Brennan (Contact Author)

Harvard Law School ( email )

1557 Massachusetts Ave
6 Ever
Cambridge, MA 02138
United States
617-495-3141 (Phone)

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