The Uneasy Case for Deferring Banker Pay

The article offers information related to banker-pay regulation in the context of overall financial regulation in the U.S. state Louisiana. In mentions that the primary goal of financial regulation is to reduce systemic risk associated with the economic conditions of the state. It mentions that the regulations should be framed for preventing risk associated with extraordinary and external costs of distress of banks and financial firms

Taxing Losers

The U.S. tax system, like most in the world, benefits capital gains in two ways. Investors can defer paying tax until they “realize” any gain (typically by sale) rather than when the gain simply occurs via rising prices. Additionally, individual investors pay a lower, preferred rate on their long-term capital gains as compared to their other ordinary income (such as compensation or business profits). However, investors face a burden with respect to their capital losses. Rather than allowing for unlimited capital loss deductions, the Code largely forces investors to match their capital losses against their capital gains. Limits on capital losses could be justified in several ways. The most prominent justification holds that taxpayers should not be able to “cherry pick” loss elements out of an overall winning portfolio. This Article seeks to clarify the nature of the cherry-picking argument. It drops “cherry picking” in favor of the somewhat more descriptive “loss harvesting” used in wealth management literature. We will imagine a world in which Congress does not force taxpayers to match losses against gains. In this world, taxpayers could harvest isolated losses whenever they arise and enjoy the benefits of loss deductions—even if the taxpayer has an overall winning portfolio. Using insights from option theory, we can estimate the cost of aggressive loss harvesting. Forced matching of losses against gains is the primary way the Code curtails loss harvesting. However, forced matching comes at a cost, as it will deny loss deductions to investors who have suffered true losses. Again, option theory gives us a method for estimating these costs and—more importantly—comparing them to the costs of loss harvesting. Based on this comparison, we will see that the “cure” of forced matching may be worse than the “disease” of loss harvesting

Naked and Covered in Monte Carlo: A Reappraisal of Option Taxation

The market for equity options and related derivatives is staggering, covering trillions of dollars worth of assets. As a result, the taxation of these instruments is inherently important. Moreover, the importance is made even more acute by the use of options in creating more complex transactions and in avoiding taxes. Consider an equity call option, which entitles, but does not obligate, its holder to buy stock at a set price at a set time in the future. Option theory gives us a way to break the option down into more fundamental units. For example, an equity call option over 10,000 shares of stock might be equivalent to buying 7500 shares of stock itself. This financially equivalent synthetic option should serve as the model for taxing an actual option. That is not the approach of current law. Nevertheless, a Monte-Carlo simulation I wrote shows that current law does a good job of approximating the tax liability generated by the synthetic option - but only when we view the option in isolation. The results are radically different when the investor already owns some of the stock subject to the option. If such an investor sells (rather than buys) a call option, she has effectively sold a portion of the owned stock at fair market value. For example, the issuer of a call option over 10,000 shares may have effectively sold 7500 shares that she already owns. Option theory gives us a way to measure how much stock she has effectively sold. Taxing the sale of stock implied by many option and related contracts would reflect economic reality and curtail tax-motivated investments