Modernization of Derivatives Tax Act of 2026

Key Points

• This bill fundamentally changes how financial derivatives (options, futures, swaps, and similar contracts) are taxed. Instead of waiting until an investor sells or closes a position, the government would tax the change in value at the end of every year, a system known as mark-to-market taxation.
• Most gains and losses from derivatives would be treated as ordinary income rather than capital gains. This means they would be taxed at higher ordinary income rates instead of the lower capital gains rates many investors currently enjoy on these instruments.
• The bill creates a new system called "investment hedging units" that groups a derivative together with the underlying investment it protects. This lets the tax treatment reflect the actual economic gain or loss across the combined position, using a mathematical measure called "delta" to determine which positions qualify.
• The definition of "derivative" is very broad, covering contracts whose value is tied to stocks, bonds, partnership interests, real property, actively traded commodities, currencies, or any rate, price, index, or formula. Several exceptions exist for hedging transactions, insurance contracts, and employee stock options.
• The new rules would take effect 90 days after the bill is signed into law. Taxpayers who already hold derivatives at that point would need to identify their positions and set up investment hedging units before the deadline.
• The bill repeals several longstanding sections of the tax code that currently govern derivatives, including rules for short sales, options, regulated futures contracts, constructive sales, and straddles. It replaces them all with a single unified framework.

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