IRS Proposes To Classify Basket Contracts As A Tax Avoidance Scheme

The U.S. Department of the Treasury and IRS on July 11, 2024, issued proposed regulations that would classify certain basket contract transactions as listed transactions. Taxpayers and material advisers participating in listed transactions must comply with disclosure and recordkeeping requirements and are subject to penalties for failure to comply.

Basket Contracts

A basket contract transaction is a structured financial transaction, generally involving an option, notional principal contract, forward contract or other derivative contract, through which taxpayers invest in assets normally generating ordinary income and short-term capital gain if held directly by the taxpayer. In the basket contract transactions identified by the proposed regulations, the taxpayer's position is that if they hold their basket contract for more than one year, ordinary income generated by the investments is deferred, and what would otherwise be short-term capital gain is converted to