I need to lose $5000. (long term capital gains) in order to make over $20,000. Obamacare...

How about this? Do a pairs strategy on two highly correlated stocks in the same sector. Buy a gold stock and short another one (pick whatever sector amuses you). Weight the positions accordingly.

Barring some company specific news, chances are that they will have similar $$ performance but in opposite directions. If the losing side accelerates more than the other, use options to titrate the balance.

Whenever you want, but by the end of the year, harvest the loss, replace it with another similar stock and keep winner on paper. You might net a few bucks up or down but you'll generate a tax deduction while avoiding "substantially similar".

Wash, rinse, repeat and when you're eligible for Medicare, clean up the mess :D
 
spindr0 said:
How about this? Do a pairs strategy on two highly correlated stocks in the same sector. Buy a gold stock and short another one (pick whatever sector amuses you). Weight the positions accordingly.

Barring some company specific news, chances are that they will have similar $$ performance but in opposite directions. If the losing side accelerates more than the other, use options to titrate the balance.

Whenever you want, but by the end of the year, harvest the loss, replace it with another similar stock and keep winner on paper. You might net a few bucks up or down but you'll generate a tax deduction while avoiding "substantially similar".

Wash, rinse, repeat and when you're eligible for Medicare, clean up the mess :D
More...

There are rules about how straddles are taxed that are meant to address such techniques. Basically, if you have offsetting positions and sell one at a loss, it should just get added to the cost basis of the remaining position.

The only way I know of to generate losses for tax purposes is to do something like what Betterment offers. For example, instead of investing in an S&P fund, buy 20 individual components and then keep rotating out the losers.
 
Here's the IRS info on "Presumed offsetting positions" :

-----

Two or more positions will be presumed to be offsetting if:

(1) The positions are established in the same personal property (or in a contract for this property), and the value of one or more positions varies inversely with the value of one or more of the other positions;

(2) The positions are in the same personal property, even if this property is in a substantially changed form, and the positions' values vary inversely as described in the first condition;

(3) The positions are in debt instruments with a similar maturity, and the positions' values vary inversely as described in the first condition;

(4) The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name; or

(5) The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held separately.

------

The OP's post implies that he has a decent sized portfolio (he indicated that it will be throwing off close to $68k of gains this year). Are you certain that if he adds a short position in Exxon Mobil and a long position in Chevron (executed on different dates) that the IRS will conclude that these two stock components of his multi stock portfolio are "substantially identical" or are "Presumed offsetting positions" ?
 
elt894 said:
The only way I know of to generate losses for tax purposes is to do something like what Betterment offers. For example, instead of investing in an S&P fund, buy 20 individual components and then keep rotating out the losers.
More...

And what if he picks 20 winners ???

:D
 
spindr0 said:
Here's the IRS info on "Presumed offsetting positions" :

-----

Two or more positions will be presumed to be offsetting if:

(1) The positions are established in the same personal property (or in a contract for this property), and the value of one or more positions varies inversely with the value of one or more of the other positions;

(2) The positions are in the same personal property, even if this property is in a substantially changed form, and the positions' values vary inversely as described in the first condition;

(3) The positions are in debt instruments with a similar maturity, and the positions' values vary inversely as described in the first condition;

(4) The positions are sold or marketed as offsetting positions, whether or not the positions are called a straddle, spread, butterfly, or any similar name; or

(5) The aggregate margin requirement for the positions is lower than the sum of the margin requirements for each position if held separately.

------

The OP's post implies that he has a decent sized portfolio (he indicated that it will be throwing off close to $68k of gains this year). Are you certain that if he adds a short position in Exxon Mobil and a long position in Chevron (executed on different dates) that the IRS will conclude that these two stock components of his multi stock portfolio are "substantially identical" or are "Presumed offsetting positions" ?
More...

First, the customary caveat that I'm not a lawyer or CPA. Also, my impression is that enforcement of straddle rules is mainly targeted at institutional investors and your run-of-the-mill auditor probably wouldn't catch it. That said, I do think the IRS could win if the case were tried.

In a portfolio margin account, long Chevron/short Exxon has a lower margin requirement than the individual positions, so (5) potentially applies. The standard for straddles is "substantial reduction in risk of loss," rather than the "substantially identical" rule for wash sales or "substantially similar" rule for constructive sales. This is very broad, and I've read that the reason for the "identified straddle" rule is so taxpayers with a lot of long and short positions can prevent their entire portfolio from becoming one giant straddle.

My interpretation of the wording in the tax code is that positions can be deemed to be offsetting even if they don't meet the presumption tests, and presumed offsetting positions can be argued to not be offsetting. It just shifts who has the burden of proof. But that's something we'd really need a lawyer to weigh in on.
 
elt894 said:
In a portfolio margin account, long Chevron/short Exxon has a lower margin requirement than the individual positions, so (5) potentially applies
More...
That would not be true at IB at least in general, not sure about which portfolio margin account you're using. You just get a 15% requirement on both the long and short pieces (instead of 25-30% each), but no offsetting that I know about.
 
I too am neither a CPA or a lawyer, just a mere commoner trying to fathom IRS mumbo jumbo.

Let's take it one step further. Instead of XOM and CVX, find two highly correlated stocks. Suppose it's a gold stock and XOM. Buy one and short the other, hoping to generate an offsetting loss on one of them. If the IRS can make the case that this pair provides a "substantial reduction in risk of loss" due to lower margin requirement than the individual positions then that means that any short equity position you can take creates a straddle. That seems like A Bridge Too Far to me.
 
MoreLeverage said:
That would not be true at IB at least in general, not sure about which portfolio margin account you're using. You just get a 15% requirement on both the long and short pieces (instead of 25-30% each), but no offsetting that I know about.
More...
My mistake, I was looking at the preview for a combo order, but didn't realize I had put in 1 share instead of 100 (the margin requirement did seem ridiculously low). I think you do get a margin benefit for ETFs in the same sector.

Then it just comes down to whether positions can be deemed offsetting even if the presumption criteria don't apply.
 
spindr0 said:
Let's take it one step further. Instead of XOM and CVX, find two highly correlated stocks. Suppose it's a gold stock and XOM. Buy one and short the other, hoping to generate an offsetting loss on one of them. If the IRS can make the case that this pair provides a "substantial reduction in risk of loss" due to lower margin requirement than the individual positions then that means that any short equity position you can take creates a straddle. That seems like A Bridge Too Far to me.
More...

I agree it seems too far, but I've come across some articles that suggest it's not entirely impossible. I can't find the one I'm thinking of now, but this paper talks of hypothetical surprise applications of the straddle rules. In the background section, they write that for an insurance company, a short derivative position might be ruled a straddle with the company's entire bond portfolio even if it's much smaller in size.

To implement such a strategy in practice, you'd probably go long and short a whole basket of stocks. Then I think the case becomes stronger that a straddle exists, and it's more difficult to keep it from encompassing your entire portfolio.

I actually usually prefer to treat my positions as straddles when applicable. You can add expenses like borrow fees and margin interest to the cost basis rather than taking them as itemized deductions subject to the 2% gross income threshold.
https://www.irs.gov/publications/p550#en_US_2017_publink100010295
 
You must log in or register to reply here.
Back
Top