The tax bill closig a multi-billion-dollar loophole called a commodity straddle will force changes in commodity trading patterns, industry leaders predicted yesterday.
But they said it is too early to assess the full impact of commodity tax law revisions made in the tax package that was given final approval yesterday by the House.
"This is not the end of the world for the market," said Commodity Futures Trading Commissioner James Stone.
The bill effectively eliminates a commodity trading technique called a tax straddle that has been used for years to reduce tax bills or in some cases to avoid them entirely.
Treasury officls said the straddle bill will enable them to collect an estimated $1.4 billion a year in new revenue.
Other provisions cut the maximum tax rate on commodity trading profits from 70 percent to 32 percent and give commodity traders five years to pay any extra taxes they owe because of the changes in the law.
The bill also eliminates the need to hold commodity investments for 6 months in order to qualify for the lowest, long-term capital gains tax rate.
Now commodity profits will be taxed at the 32 percent rate regardless of whether the commodity was owned for several years or a single day.
"It's not generally recognized that this is the most significant thing that happened," said Glenn Willett Clark, a Washington attorney who follows commodity matters closely.
Executives of the two big Chicago commodity markets agreed, predicting the law will result in more investment in short-term commodity futures contracts and less interest in longer-term ones.
Clayton Yeutter, president of the Chicago Mercantile Exchange, repeated warnings that the new law could make it more difficult for grain companies and other commodity users to share the risk of long-term price changes.
"It's going to be more difficult to provide risk capitol for those more distant months," said Yeutter, adding, "I do not visualize [the bill] as likely to have an overall adverse effect on the market."
At the Mercantile Exchange and across town at the Chicago Board of Trade, meetings were held yesterday to help members understand how the tax law changes will effect them.
Professional commodity traders will bear the brunt of the tax law changes because they have made extensive use of straddles to defer income from one year to the next and to convert short-term profits, previously taxed at a 70 percent rate, into long-term gains taxed at 28 percent. Neither of those maneuvers will be possible under the new law.
To ease the impact on professional traders, the law gives them five years to pay their accumulated taxes. The bill is effective June 23, but allows traders to figure their taxes for their entire year under new, lower rates.
Those transition provisions will help traders adjust to the new law, said Thomas Russo, a prominent New York commodity attorney. He called the bill "an experiment" that is "not a total disaster. It has many good aspects."
Russo said the lower tax rate for commodity traders should attract business, but that trading is likely to be in short-term futures contracts rather than longer-term.
Though aimed at commodity tax abuses, the straddle bill also affects some stock and bond market transactions.
It requires securities dealers to decide within seven days whether securities they purchase will be held for investment -- qualifying for lower capital gains taxes -- or put into their inventory, where they will produce ordinary income, with a higher tax rate.
The bill also limits the ability of syndicates that deal in bonds to pass profits and loses through to limited partners. That provision is meant to shut down several complicated tax shelters involving bond and commodity partnerships deliberately organized to create artificial tax writeoffs. But Russo warned it also could disrupt the dealings of some ordinary bond dealers.
"Every time you try to close off some tax benefits, you have to pay a price," he said, and the price of this bill to the industry is not yet known. a
The bill only outlaws use of tax straddles in the commodity market and does not regulate similar transactions in stock options. "The tax straddle isn't dead," commented attorney Clark. "It's just moved down the street.