I.R.S. Cracks Down on Hedge Fund Tax Strategy

In my opinion this is a much better article on the subject.

http://www.bloomberg.com/news/articles/2014-07-21/renaissanc...

Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower.

This obviously creates a situation where people will do their best to make their trading fall into the later category.

What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains.

The IRS has called shenanigans on this and the below quote is probably the biggest reason why:

> "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."

Well, in this case the IRS isn't passing a retroactive law, they are clarifying the interpretation of an existing law.

Ex post facto laws are criminal laws making criminal acts that were not criminal before the law was passed, or increasing the criminal punishment for crimes committed before the law was passed.

Retroactive tax laws are not ex post facto laws, and, anyway, this isn't even a retroactive tax law, its a decision about the manner in which the IRS will apply a law already on the books, which is only sustainable to the extent to which it is, in fact, consistent with the law already on the books. Its essentially the IRS coming to the view that they have not been properly enforcing existing law, and that will change for enforcement going forward (there are limits to how far back the IRS can go in enforcement actions, which presumably is the basis for the 1/1/2011 date.)

The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions.

I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock?

It's even the same word: A retail business sells its stock (product), and sells it's stock (shares)

Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)