The U.S. Internal Revenue Service is coming after hedge funds for its tax strategy known as “basket options.”
The IRS estimates that hedge funds have skirted billions of dollars in taxes using this strategy, reports Reuters. As of Wednesday, hedge funds using option must report them on their tax returns, and must correct past returns starting in 2011.
The Senate Finance Committee calls the basket options “a tax shelter.” Deutsche Bank and Barclays have been accused to helping the tax avoidance. Basket options are controlled by hedge funds as they buy and sell, and short-term traded, assets, but are held in name by the banks. Hedge funds can pay a lower tax rate on long-term capital gains, claiming the profits came from exercising the options, not trading them. The Senate says those options aren’t really options.
Renaissance Technologies Corp, one of the biggest basket options users, saved about $6.8 billion in taxes using this strategy.
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