Renaissance Technologies has agreed to pay $7bn in tax to the IRS.

That’s a nice chunk of change, even for them.

Here is the issue at stake

• Trading profits can be taxed at the short-term capital gains rate (<1Y, ordinary income) or at the long-term capital gains rate (>1Y, likely 20%).
• At stake here is Rentech’s entire option trading activity. Each trade is definitely held for less than a year, but all these trades are aggregated into one single derivative (of dynamic composition), which lasts many years.
• The IRS has been characterized the activity as short-term, while Rentech argued that it was long-term.
• In 2015, Congress changed the law to make the issue more clear – and short-term.
• The IRS made the rule retroactive to January 2011.

RenTech has finally settled on $7 bn, to avoid a larger payout if he lost the tax court proceedings.

The liability will fall on the fund’s investors, aka the companies employees but mostly Mr. Simmons himself.

Related Navesink article

• June 2021: Renaissance underperformance and redemptions – not for everyone

Reference

• New York Times, September 2, 2021: Hedge Fund’s Insiders Agree to Pay as Much as $7 Billion to I.R.S.