I suggest taxing qualifying derivative contracts by classifying into four categories such as forward, future, option and swap contracts. The gain or loss from trading derivative instruments should be included in taxable income in the year that covers maturity date, offsetting sales date or payment date. However, the gain or loss from measuring derivatives at year-end is taxable for exchange-traded contracts. Otherwise, it is taxable only when one of the parties to the contracts is a financial institution that uses reliable valuation models for derivative instruments. To the extent that hedge accounting is accepted, fair value measurement of hedged items should also be allowed. And the gain or loss on a derivative contract must be recognized as taxable income in the same period during which the change in value of the item being hedged affects taxable income. To enhance effectiveness of the taxation of derivative contracts, we suggest taxing certain option contracts under which one party transfers gain to the other through exercising or not exercising his/her right by applying the recalculation rule for unfair practices or the constructive rule. Finally, to minimize the likelihood that the gain on appreciated financial position together with derivative contracts is realized without paying or deferring taxes, I suggest treating the appreciated financial position as constructive sales-as if the derivative instruments of concern are sold at fair value.
derivatives,forward,future,option and swap contracts.