Tax "deferral" via hedge fund structure

TraderZones · Mar 7, 2009

Quote from heech:

It's possible, but as I said, I believe you have to file and pay UBIT (as I hope you're doing).

Within your IRA, UBIT is unnecessary. All income builds up tax free - there is no requirement of filing anything.

And leverage is allowed in the exact same way as with a regular taxed broker. The only requirement, is to set it up through a trust company, which is quite simple to do.

The only thing that matters, is you have to take out income at certain points in the future. Then, you must pay income tax on what comes out of standard IRAs, and nothing needs to be paid on Roth IRAs.

heech · Mar 8, 2009

Quote from TraderZones:

Within your IRA, UBIT is unnecessary. All income builds up tax free - there is no requirement of filing anything.

I'd love to see a reference backing this up. Everything I've always heard, everything I've always read suggests otherwise.

http://www.pgdc.com/pgdc/news-story/2000/04/18/income-securities-purchased-margin-ubti

Income from Securities Purchased on Margin is UBTI

In Henry E. & Nancy Horton Bartels Trust v. United States, in which a supporting organization invested in securities using funds borrowed from its stockbroker, the court held, in part, that under the plain language of the UBIT rules, the purchase of securities on margin is a purchase using borrowed funds, which constitutes "acquisition indebtedness," causing the securities to be "debt-financed property." Thus, the income derived from these securities were treated "as an item of gross income derived from an unrelated trade or business" and should be included in the computation of unrelated business taxable income.

TraderZones · Mar 8, 2009

Quote from heech:

I'd love to see a reference backing this up. Everything I've always heard, everything I've always read suggests otherwise.

http://www.pgdc.com/pgdc/news-story/2000/04/18/income-securities-purchased-margin-ubti

Income from Securities Purchased on Margin is UBTI

In Henry E. & Nancy Horton Bartels Trust v. United States, in which a supporting organization invested in securities using funds borrowed from its stockbroker, the court held, in part, that under the plain language of the UBIT rules, the purchase of securities on margin is a purchase using borrowed funds, which constitutes "acquisition indebtedness," causing the securities to be "debt-financed property." Thus, the income derived from these securities were treated "as an item of gross income derived from an unrelated trade or business" and should be included in the computation of unrelated business taxable income.

IRA: Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax (see below for details).

"UBIT" is no different. Regardless of how $$$ came in, it is never taxed until withdrawn

Daal · Mar 8, 2009

You can setup an offshore company but
-you cant own it so the IRS bs that its passive investment company doesnt apply

then you would be an employee of the company with signatory powers for the company bank account and power of attorney. You would be a portfolio manager getting a salary perhaps a bonus every now and then. I sure you would have to report your powers to the IRS but you cant own any tax since you dont own the company(furthermore your powers are completly consistent with your position)

The trick is finding a non-US trustworthy person/institution to own the company but some jurisdictions dont keep any record of shareholders of corporations

Dont take this as legal advice, consult with an expert in offshore institutions

heech · Mar 8, 2009

Quote from TraderZones:

IRA: Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax (see below for details).

"UBIT" is no different. Regardless of how $$$ came in, it is never taxed until withdrawn

I'm starting to get the feeling you're really pulling stuff out of your butt, and rather irresponsibly.

You must file showing UBTI the year the income is generated, not the year you withdraw. UBTI is absolutely different from all other income/gains in your IRA, from a taxation point of view.

If you've been using debt-based leverage in your IRA and NOT filing/paying UBTI... I'd suggest you go find a tax attorney and file an amendment, before the IRS comes auditing.

Joetrader · Mar 10, 2009

I am 100% sure that if you leverage even 1$ of margin in your IRA that you have to pay UBTI (not UBIT) on all gains derived from this leverage. I know because I had this happen to some of my US clients in my onshore fund and I moved them to the offshore fund which solved the problem. Also I have filed UBTI for my US IRA's for many years personally (well my big 4 accounting firm did).

If you are convinced you know something about IRA's because you know others that do the same the let me give you this anecdote. I met an idiot who had opened 10 different IRA accounts and had been putting 5k a year IN EACH ONE for a dozen years (well up from 2k previous max). I explained to him that this was totally illegal and he argued that he knew others that were doing the same. Funny thing is that no one actually keeps track of this shit. Apparently all of those year end tax forms that swamp the IRS cannot be processed? Funny story, huh?

GTS · Mar 10, 2009

Quote from heech:

I'd love to see a reference backing this up. Everything I've always heard, everything I've always read suggests otherwise.

http://www.pgdc.com/pgdc/news-story/2000/04/18/income-securities-purchased-margin-ubti

Income from Securities Purchased on Margin is UBTI

In Henry E. & Nancy Horton Bartels Trust v. United States, in which a supporting organization invested in securities using funds borrowed from its stockbroker, the court held, in part, that under the plain language of the UBIT rules, the purchase of securities on margin is a purchase using borrowed funds, which constitutes "acquisition indebtedness," causing the securities to be "debt-financed property." Thus, the income derived from these securities were treated "as an item of gross income derived from an unrelated trade or business" and should be included in the computation of unrelated business taxable income.

When you are trading futures in an IRA you are not using borrowed funds so what you quoted above doesn't apply.

heech · Mar 10, 2009

Quote from GTS:

When you are trading futures in an IRA you are not using borrowed funds so what you quoted above doesn't apply.

I was wondering about that, which is why I specifically said "debt-based" leverage, ie, margin.

I have no idea how leverage for futures work. If there's no debt involved, then presumably there's no UBTI.

GTS · Mar 10, 2009

Quote from heech:

I was wondering about that, which is why I specifically said "debt-based" leverage, ie, margin.

I have no idea how leverage for futures work. If there's no debt involved, then presumably there's no UBTI.

Fair enough. I thought this whole tangent started when TraderZones said "Why not just put the money into IRAs, and trade it in futures, whatever?"

I trade futures in an IB IRA and I don't file any special paperwork, just like TraderZones said.

Aaron · Mar 11, 2009

Quote from heech:

Income from Securities Purchased on Margin is UBTI

Like GTS said, the performance margin posted for futures trading is not the same as borrowing money or buying "on margin". And also, futures are not included in the definition of "securities". No UBTI on futures or futures options trading.