The Treasury Department and IRS issued guidance on Wednesday to effectively halt the use of so-called “basket options,” a tax loophole that high-net-worth investors use when investing in alternatives.
Treasury and IRS noted in their joint guidance their concern that taxpayers are using basket option contracts to “inappropriately defer income recognition and convert ordinary income and short-term capital gain into long-term capital gain.”
In some cases, “taxpayers are mischaracterizing a transaction as an option to avoid” paying taxes.
Because of this loophole, Treasury and IRS said they are now identifying a basket option contract and substantially similar transactions as “listed transactions,” which means that those using the strategies must declare them on their tax returns. Those who don’t would face penalties.
Senate Finance Committee Ranking Member Ron Wyden, D-Ore., applauded Treasury and the IRS’s move, stating they’re heeding his call to them in June to take action and “bring the hammer down on these basket options once and for all.”