Proshares tax disaster

[stock777]

Anyone get reamed by the huge capital gains distributions on many of these?

You own $10,000 in a taxable account. They distribute 50% in short term cap gains.

You now owe tax on $5000 even though you have made nothing.

Makes Madoff look good.


http://seekingalpha.com/article/112...m-capital-gains-distributions?source=wildcard

 

[MrDODGE]

This is the reason why people should only invest in what they understand.

 

[Cutten]

I'm not sure who is more incompetent here: the US tax authorities, Proshares, or daytraders who think 2x and short ETFs are a good idea.

 

[NY0BScalper]

Quote from Cutten:

I'm not sure who is more incompetent here: the US tax authorities, Proshares, or daytraders who think 2x and short ETFs are a good idea.

Erm... gotta say my man, there's sick opportunity... I know it's hindsight analysis but look at last two times SKF tested 100 and tell me even you couldn't have seen some opportunities to make 10-40% on your investment.

I'm only saying this because I was LATE TO THE GAME on the EASY MONEY in proshares... the way I see it is, if I make my living from pure orderbook scalping, and I was able to add a nice chunk to my christmas bonus by trading those ETFs off charts... there's gotta be something there. Some will call me lucky. I won't argue... but most likely they're missing out.

 

[gnome]

Quote from stock777:

Anyone get reamed by the huge capital gains distributions on many of these?

You own $10,000 in a taxable account. They distribute 50% in short term cap gains.

You now owe tax on $5000 even though you have made nothing.

Makes Madoff look good.


http://seekingalpha.com/article/112...m-capital-gains-distributions?source=wildcard

Not really a problem in the big picture... you get an offsetting STCL.

 

[jprad]

Quote from stock777:

You own $10,000 in a taxable account. They distribute 50% in short term cap gains.

You now owe tax on $5000 even though you have made nothing.

My understanding is that a taxable distribution does not change the cost basis of your investment.

If that's correct, you "made" the $5K distribution.

 

[jprad]

Quote from Cutten:

I'm not sure who is more incompetent here: the US tax authorities, Proshares, or daytraders who think 2x and short ETFs are a good idea.

2x gearing aside, how does day-trading these things affect someone who's flat come the end of the day?

IMHO, some of these ultra-shorts have incredible intraday trends, which is easy money if you can handle the swings.

So what that's it's a short-term gain? I'd expect the IRS to treat all of these as short term the same way they do if you were to short the underlying.

 

[gnome]

Quote from jprad:

My understanding is that a taxable distribution does not change the cost basis of your investment.

If that's correct, you "made" the $5K distribution.

By example... let's say you bought an ETF @ $100. That's your cost basis.

Then, you get a distribution of $50.. a mix of STCG and LTCG. You have to pay tax on the distribution as "dividend or capital gain" of some sort.

At the distribution, the price of the ETF drops an equivalent $50. You sell, and take a $50 STCL from your $100 basis cost.

You don't "make" anything on the distribution.. it's just a tax accounting mechanism. It could put someone in a bind short term, however. You'd have to pay tax on the distribution this year, but if you had trading net losses, you'd have to carry your loss on this trade over to the future. Assuming you eventually made up all of your losses, there is virtually no overall economic impact to receivng the distribution nor selling the position at a loss after the distribution.

 

[jprad]

Quote from gnome:

You don't "make" anything on the distribution.. it's just a tax accounting mechanism. It could put someone in a bind short term, however. You'd have to pay tax on the distribution this year, but if you had trading net losses, you'd have to carry your loss on this trade over to the future. Assuming you eventually made up all of your losses, there is virtually no overall economic impact to receivng the distribution nor selling the position at a loss after the distribution.

If the distribution does adjust the cost basis as a stock dividend would, and someone is up against the $3k loss limit, then having your broker reinvest the distribution is probably the best bet, agreed?

 

[gnome]

Quote from jprad:

If the distribution does adjust the cost basis as a stock dividend would, and someone is up against the $3k loss limit, then having your broker reinvest the distribution is probably the best bet, agreed?

No. The distribution does not adjust the cost basis... in the example, $100 is the cost basis both before and after the diistribution. I don't trade individual stocks.. but I believe I'm correct in saying that a stock dividend does NOT adjust your cost basis when accounting for taxes* .... and if it did, it would be unfair and bad for you.

Reinvesting the distribution has no effect on taxes. Even if it's reinvested, you'd still pay the tax on the distribution this year.

* Let's say you buy a $50 stock and get a $2 dividend. Your "cost" (from your profit perspective) been reduced to $48... as the $2 dividend basically just gave you back some of your purchase price. But "cost basis" is different.

For tax calculation, your "cost basis" is still $50... you get to "make back" that $2 dividend in stock price appreciation (from $48 to $50) without tax consequences.