ASSOCIATION
INVESTOR TAX RELIEF

Many investors have suffered significant losses in the markets these past few years. They attribute these losses to the balloon/bust cycle, which they believe was knowingly caused by unscrupulous corporations. These corporations and their auditors cooked the books to make it seem like their company was worth investing in, and then the investment bankers and analysts hyped these companies to the public, even though they knew they weren’t worth investing in. Many investors suffered significant losses, and they think it’s patently unfair that they cannot deduct their "capital losses" – which they more appropriately consider "casualty losses" – in their entirety on their tax forms.

Many people are not investing anymore because they believe the system is stacked against them. The stocks (i.e., the corporations), the market players, the banks, investments bankers and professional traders all have the edge. It is simply not fair that investors are penalized by not being allowed to deduct more than $3,000 in capital losses per year on the junk they were fed by the investment houses (like cattle in a feed lot). Meanwhile, the investment houses (the cattle ranchers and feed lot owners) use "mark-to-market accounting" to hedge their bets and take ordinary loss treatment on their trading positions. However, the investors have now woken up and are calling on Congress to fix the system and stop treating the individual like a cattle in a herd, trained to go one way and then the other.

Yes, fixing the accounting, regulatory and analyst systems is a plus. However, giving investors immediate tax relief and allowing them to deduct their existing capital losses as "ordinary losses" puts them on par with the market players on the other side of the fence – the ones who perpetrated the fraud and caused the investor losses in the first place.

Tax Relief for Investors
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The small American investor has gotten much more active in the markets over the past decade, and their paying taxes on capital gains earned during the boom years is in no small way responsible for creating the budget surplus. Investors helped fuel the new economy by buying IPO shares, and America needs investors again – this time, to buy into the new, restructured America (a melding of the new and old economies). The new economy and Internet brought about "creative destruction" to the old economy, but the side effects were excess hype and a stock market bubble that burst. As the stock markets reached a state of desperation, the players used "corporate malfeasance" to keep their ships afloat during a storm. After the wreckage, Congress is being called upon to clean up the damage, and once again the American taxpayer is footing the bill. Besides fixing the system, Congress should also provide investor tax relief to investors. Otherwise, the investor will not again buy into the American dream of buying stocks.

Millions of Americans are paralyzed with their investing activities because they don't trust the current system and they have more stock market losses then they know what to do, both from a tax and risk standpoint.

The risk problems can be improved by Congress carrying out its current drive for reform in the accounting, corporate, brokerage firm and banking industries. The new reforms should help considerably, and they should include but not be limited to: requiring CEO/CFOs to sign financial statements; requiring auditors to be independent of their corporate audit clients; requiring stock analysts to be free of “conflicts of interest” with the banking and investment banking divisions of their company (the Chinese Wall has crumbled).

Congress should not discount the tax reforms that are needed to bring about renewed investor confidence in the stock markets. Providing investor tax relief will complete the process of what is needed to get America investing again. Investors are sitting with alarmingly high "realized" and "unrealized" stock market losses, and they are extremely upset that they cannot deduct their stock market losses for tax relief. These disgruntled investors are fuming that the corporations, accountants and bankers, who conspired to take their money, have not paid taxes on their ill-gotten gains, while the investors are unable to deduct the money taken from them. These perpetrators of "corporate malfeasance" have an army of lobbyists safeguarding their "tax-avoidance schemes" (such as offshore mailboxes, tax shelters and phony deductions), while investors have no lobbyists to fight for them in Congress.

Investors do have Congress to protect their interests, and investors should send e-mails to Congress asking for this relief. See our e-mail campaign resources here. You can cut and paste this entire page and e-mail it to your representative and senators.

Wake up America! The revolution against corporate malfeasance has started, and the trend is "off with their heads." Investors number in the millions, and it’s simply outrageous that they are not receiving any tax relief for their losses. If Congress doesn't provide investors tax relief soon, there will be a bigger price to pay later on – the economy will not spring back to life, because the individual investor doesn't return to the stock markets.

America's economists are working in overdrive to figure out what ails the American economy and how to fix both "Main Street" and "Wall Street." Economists should focus on the economics facing the American investor. We believe that "fiscal tax policy" is a huge factor in economic theory, so look at how the current state of investor tax law is providing negative incentives – and nothing positive – to the individual investor.

The fiscal tax policy "positive incentive" for investors is long-term capital gains rate reduction (positions held longer than a year are taxed at a 20-percent rate, vs. the 37-percent "ordinary” tax rate). To offset this positive incentive (the "tax cost"), Congress provides investors with negative incentives (to provide for "tax revenues"), including: "ordinary” tax rates on gains on positions held less than a year; capital loss limitations of $3,000 per year; "wash sales;" and "straddles." The bottom line is that the tax incentives are designed to encourage the "buy and hold" approach. "Buy and hold" is also an investment theory marketed by brokerage firms. However, "buy and hold" has spelled disaster for investors during the stock market crash, and many investors have lost more than 70 percent of their portfolios.

The brokerage firms don't "buy and hold;" they sell quickly and methodically, and they have tax-loss “insurance" from Congress. Brokerage firms and professional traders have "mark-to-market accounting," which means they are allowed "ordinary” tax-loss treatment on their stock market losses. This is not a level playing field. The seller of securities – the brokerage firms – have tax loss insurance, but the investor has no such benefit.

The current fiscal tax policy system for investors doesn't work in today's markets. Besides not being a level playing field, the positive incentive no longer exists for many investors. Few investors sitting with large losses feel they have a positive incentive to earn a long-term capital gains rate benefit. These investors just want to make back their losses, and they fear it might take 20 years to do so. They don't want to buy another stock until they make back their losses. With the positive incentive removed, only the negative incentives of loss limitations remain. The key to unlocking renewed buying from investors is to remove the negative incentives. This will get investors back onto a level playing field.

The "buy and hold" theory is flawed and unnecessary for investors today. Commissions on buying and selling securities are very low, and brokerage firms offer investors "stop-loss" order capability, which are used by professional traders and brokerage houses to limit losses.

Congress, the SEC and the securities markets are working to make "fair" and "efficient" financial markets by having an "equal playing field" as far as the public disclosure of market information is concerned. We call on Congress to make the playing field equal for tax policy as well, specifically allowing investors to have ordinary loss treatment like the brokerage firms do. If this can’t be done for the future, then at least it should be allowed for past losses, to provide relief for the damage done. When it comes to taxes, investors’ hands are tied to "buy and hold," while the brokers (with insider knowledge) are unhampered and can sell at a loss for a tax gain. Is anyone surprised that when the "musical chairs" stopped, the investor was the one with nowhere to sit?
It makes good sense for Congress to provide incentives to the American public to "buy and hold" investments in the stock markets, but this can be done in general, and not per each investment. It’s important that Americans buy stocks, so Congress should allow investors ordinary loss treatment. This will give Americans the incentive to stay invested in the markets, rather than many of the current rules that provide a disincentive.
Perhaps Congress can change the rules to allow long-term capital gains rate benefits on stocks held for longer than three years, and ordinary gain or loss treatment on all sales within three years.

We suggest some "supply-side" economic thinking for our argument. The tax relief for investors listed below will lead to renewed selling (and later buying) of securities, which will help improve the securities markets and the brokerage firms’ financial condition. This will attract foreign investors to the American markets again, which will improve the environment for the IPO market, which will improve the venture capital market, which will lead to renewed innovation in the new economy, which will help Main Street and the entire economy. Ultimately, investors will start paying capital gains taxes again, which will help turn the budget deficit back to a surplus. Congress is not just giving investors back the taxes they paid during the boom cycle (as is done for business taxpayers using the net operating loss tax law), they are investing in the American people, and this investment will pay off handsomely in the long run. Isn't this the role of the federal government?

Tax relief ideas for Investors

1. "Capital loss" limitations for individuals should be raised from the existing $3,000 per year to a materially higher amount. This is a simple fix and it has already been proposed in many previous tax bills before. For example, one bill proposed a new limit for individuals in the amount of $10,000.

2. Securities trading positions may retroactively be treated like "commodities" (IRC Section 1256 contracts). IRC Section 1256 losses may be carried back three tax years, as long as they are applied against IRC Section 1256 gains in those prior tax years.

In many respects, securities trading has become like commodities trading during the past few years. Securities include "options on securities" and "narrow-based" indices. Many investors don't hold stocks for the long term; instead, they seek quick changes in price. Certainly, traders and active investors should be allowed the same carry-back treatment as commodities traders.

This investor tax relief can require that investors or traders in securities retroactively elect to forgo the long-term capital gains treatment on identified securities and instead be allowed to treat those securities positions like Section 1256 contracts with the three-year carry-back rule.

3. Securities tainted by "corporate malfeasance," such as Enron and WorldCom (and many others to be identified by Congress), can be identified as such. Investors may then apply "casualty loss" tax rules instead of "capital loss" rules. Why should these investors/victims of corporate malfeasance be penalized with the onerous "capital loss" rules, which otherwise do not provide the tax relief they deserve?

According to the IRS, "Casualty losses can result from the destruction of, or damage to your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. (How about a stock market bubble caused by "corporate malfeasance?")

If your property is not completely destroyed or stolen, determine your loss from a casualty by first figuring the decrease in fair market value of your property as a result of the casualty event. To do this, you must determine the fair market value of your property both immediately before and immediately after the casualty. An appraisal is the best way to make this determination. Compare the decrease in fair market value with your adjusted basis in the property. The adjusted basis is usually the cost of the property plus or minus certain adjustments. From the smaller of these two amounts, subtract any insurance or other reimbursement you receive or expect to receive. The result is your loss from the casualty. For more information about the basis of property, refer to Publication 551, Basis of Assets.

Up to this point, figuring the deductible loss is the same for both business and personal– use property. If the property was held by you for personal use, you must further reduce your loss by $100. This $100 reduction for losses of personal–use property applies to each casualty or theft event that occurred during the year. The total of all your casualty and theft losses of personal-use property must be further reduced by 10% of your adjusted gross income. The $100 and 10% reductions do not apply to income-producing property (which is also "non-business" property)."

4. Trader Tax Relief & Correction. Traders who qualify as being in the business of securities and/or commodities trading may retroactively apply "mark-to-market accounting" (IRC Section 475), similar to professional traders and "dealers in securities" (the banks and brokerage firms). It should be irrelevant whether traders elected IRC 475 on time (as required by current tax law). Most traders did not know about this trader tax relief passed by Congress in 1997. We cover "trader tax relief" separately in detail. Click here.

5. Change the rules to allow long-term capital gains rate benefits on stocks held for more than three years, and ordinary gain or loss treatment on positions held less than three years.

6. Allow investors ordinary tax loss treatment for all losses suffered through calendar year 2003, with the condition that investors reinvest their tax refunds attributable to this law change into new securities purchased in the securities markets.

If you are interested in our ideas for "investor tax relief," please contact the author of this piece, Robert A. Green, CPA, at (212) 658-9502. Or, you can e-mail him at investorrelief@greencompany.com.