Senate Report Says Hedge Funds Saving Billions With Tax Avoidance Technique
Companies Claimed Lower Long-Term Capital Gains for Trading Activity
WASHINGTON—Hedge funds used a tax avoidance technique offered by Wall Street banks for years to skirt federal leverage trading limits, with one well-known trading firm potentially avoiding $6.8 billion in U.S. taxes, Senate investigators claim in a report released Monday.
Companies involved in the practice have pushed back against the Internal Revenue Service, which warned in a 2010 memo against claiming a tax break based on the use of financial products known as basket options. The companies said use of the products to claim lower long-term capital gains tax treatment for trading activity is legal and doesn't violate tax rules or leverage limits under current law.
The report by the Senate Permanent Subcommittee on Investigations suggests the practice was widespread in the financial industry over the last 15 years or so, with one hedge fund, Renaissance Technology Corp. LLC, potentially saving $6.8 billion in federal taxes.
Investigators said two banks, Deutsche Bank AG and Barclays Bank PLC, sold 199 basket options to more than a dozen hedge funds, which used them to conduct more than $100 billion in trades.