By Kim Dixon and Doris Frankel

WASHINGTON/CHICAGO, Feb 19 (Reuters) – The Obama administration’s proposal to end preferential tax treatment for derivatives traders — a move that critics say would raise the cost of trading — faces steep hurdles if it is ever to become law.

Among the obstacles standing in the way of the administration’s plan to increase taxes for derivatives professionals: a political stalemate in Congress, an influential lobby on Capitol Hill and the fact that the plan is not included in any financial reform legislation.

“I don’t think this has much of a chance at all — this is a very strong lobby and prior efforts have been roundly rejected,” said Anne Mathias, an analyst at Concept Capital.

The proposal would eliminate the treatment of booked profits for options market makers and futures professionals as capital gains, and instead subject them to much steeper ordinary income tax rates. The tax breaks were implemented when market makers were first required to mark their positions at year-end and pay taxes on booked profits.

The tax provision allows 60 percent of profits to be treated as long-term capital gains and the rest as short-term. That means that market makers pay a blended capital gains/ordinary tax rate of 23 percent of their income instead of up to 35 percent in 2010, or 39.6 percent as of 2011 if the proposal makes it into law.