Not Allowed to Open a Position Contract Subject to 871 (M)

As the world of finance and trading continues to evolve, it is important for professionals to stay updated with the latest laws and regulations. One such regulation that has been causing some confusion and concern is section 871(m) of the Internal Revenue Code. This section prohibits the opening of a position contract subject to section 871(m) unless certain requirements are met. In this article, we will explore what section 871(m) entails and what it means for traders and investors.

First, let’s define section 871(m). It is a tax provision that was introduced as part of the Hiring Incentives to Restore Employment (HIRE) Act in 2010. The aim of the provision is to prevent non-U.S. investors from avoiding taxes on dividend payments by entering into certain derivative contracts. This is done by treating certain derivative contracts as if they were the equivalent of owning the underlying stock. Essentially, if an investor enters into a contract that references a dividend-paying U.S. stock, then that investor is subject to U.S. withholding taxes on any dividend payments associated with that stock.

So, what does this mean for traders and investors? Well, it means that if you are not a U.S. person and you enter into a position contract that is subject to section 871(m), you will be subject to U.S. withholding taxes on any dividend payments associated with that contract. This can be a significant financial burden and may make entering into such contracts unattractive.

However, there are certain exceptions and exemptions that may apply. For example, if the position contract is traded on a qualified exchange and certain documentation is provided, then the contract will not be subject to section 871(m). Additionally, if the position contract meets certain criteria, such as having a delta of 0.8 or greater, then it will not be subject to section 871(m).

It is important for traders and investors to be aware of section 871(m) and its implications. Failing to comply with the regulation can result in significant financial penalties. It is also important to note that section 871(m) is just one of many regulations that traders and investors need to be aware of. Working with a qualified tax professional can help ensure compliance with all relevant regulations and laws.

In conclusion, section 871(m) is a tax provision that requires non-U.S. investors to pay U.S. withholding taxes on any dividend payments associated with certain derivative contracts. Traders and investors need to be aware of the regulation and its exceptions and exemptions to ensure compliance and avoid financial penalties. As the financial industry continues to evolve, it is important to stay informed about the latest laws and regulations.