U.S. Senate Finance Committee Chairman Ron Wyden, D-Ore., June 8, 2021, U.S. Senate Finance Committee Hearing Charles P., questions the memo.
Tom Williams | swimming pool | Reuters
Senate Finance Committee Chairman Ron Wyden, D-Ore., Issued a new exchange-traded fund levy to help pay off Democrats’ $ 3.5 trillion budget.
Exchange-traded funds, or ETFs, are baskets of assets – such as stocks or bonds – and can be bought or sold like stocks throughout the day. Although ordinary investors do not directly own the shares, a fund manager can buy or sell the underlying assets to financial institutions.
Regular investors generally avoid taxes on holding the fund because financial institutions can swap underlying assets for others, so-called “in-kind” transactions, which do not trigger capital gains.
Under the proposal, Wieden calls for an end to tax breaks for transactions like these, which could affect all investors in the US $ 6.8 trillion exchange-traded fund industry.
The scheme aims to crack down on financial institutions that escape capital gains tax.
“We’re only talking about the taxable accounts of the wealthiest investors,” Widen said in a statement, as the plan allows ETFs to be exempt from tax-deferred pension plans, such as 401 (k) plans or individual retirement accounts. East.
“This particular proposal applies the same rules that already apply to corporate-regulated investment firms, so wealthy investors can no longer avoid all taxes on their profits,” he said.
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Fund managers use in-kind trading tactics to get rid of valuable assets without making taxable transactions.
For example, a fund manager can ask a financial institution to deposit shares, and the financial institution buys back the assets that the fund manager wanted to sell two days later, in a process known as “pacing trading.” cardiac ‘.
“Everyone uses [heartbeat trades] That’s when there will be a rebalancing, ”said Jeffrey Colon, a law professor at Fordham University who has researched the subject.
The plan to tax a company like Wyden’s has already drawn backlash from the ETF industry, saying the plan could hurt small investors as they could also be subject to taxes.
According to preliminary estimates from the non-partisan Joint Committee on Taxation, Wyden’s proposal could bring in $ 200 billion over the next decade. However, lawmakers are still debating how to fund the $ 3.5 trillion budget.
“As the Senate Democratic Caucus continues to review the menu of tax policy that I have proposed, this loophole-closing package will be an important part of our conversation,” Wyden said.