August 17, 2021 | Stamford, CT — A Congressional bill being sold as a crackdown on “hedge fund tycoons” and “millionaire fund managers” would hike costs for millions of small retail investors that have entered the U.S. equity market through retail brokerage mobile applications and other zero-commission trading services. 

On August 5, 2021, Senate Finance Committee Chair Ron Wyden, D-Ore., and Senator Sheldon Whitehouse, D-R.I submitted a bill that, among its many provisions, would require investors to pay taxes annually on the unrealized gains of assets held in their portfolios. That legislation is an attempt to introduce a mark-to-market taxation scheme in which taxes are assessed on unrealized gains or losses annually, regardless of whether the asset is actually sold. 

“With more than half of American households now having some form of ownership in the stock market, changes to the tax treatment of securities and derivatives must be carefully examined to avoid unintended consequences that would affect the middle income investors in our markets,” says Shane Swanson, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of Mark-to-Market Tax Policy: Potential Impact on the Exchange-Traded Options and Equities Markets. “The current proposal would hurt institutional and small retail investors alike.”

Volumes in both equities and equities options markets soared in 2020, growing by more than 50% year over year in both markets. A huge part of that growth has come from new retail accounts. More than 10 million new brokerage accounts opened in 2020 alone. In that year, retail trading doubled to 20% of market volume. 

In addition to increasing costs for millions of these retail investors, the move to mark-to-market accounting would have an immediate, chilling impact on both the equities and options markets, Swanson says. “These proposals inject uncertainty and instability into an extraordinarily well-functioning and growing part of the market,” he explains. “The end result will be less a liquid U.S. equity market, which is not good news for anyone.”

Mark-to-Market Tax Policy: Potential Impact on the Exchange-Traded Options and Equities Markets analyzes the potential impact of mark-to-market tax legislation, starting with an overview of current equity and options market structure, a look at the explosive growth of retail investing, and finally, an examination of how changes in tax policy would affect retail investors, institutional participants, and markets themselves.