Abstract
This article explores the conceptual and practical foundations and limits of the economic substitute argument for taxing hedging like a disposition. Within the context of an income tax, reformations of the realization requirement to apply to hedges might well accomplish little improvement in the efficiency and equity of the tax system because the realization requirement itself is a departure from an ideal income tax. Although treating hedging as a realization event might reduce transaction costs associated with hedges, it would encourage taxpayers to engage in more complicated and expensive transactions to avoid the new realization rule and would increase the extent to which taxpayers are locked into investments that they would prefer to sell. As to equity, the current ability to hedge without tax undermines the tax on capital. But, so too does the ability to hold without tax, and this undermines the equity argument for taxing hedging. By exposing the inevitable formality of the realization requirement, this article supports examination of a broader reform that would apply accrual taxation to marketable securities.
Recommended Citation
Deborah L. Paul,
Another Uneasy Compromise: The Treatment of Hedging in a Realization Income Tax,
3 Fla. Tax Rev.
(1998).
Available at: https://scholarship.law.ufl.edu/ftr/vol3/iss1/1