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G2 FinTech Hosts Informative Webinar on Tax-Aware Investing
Wednesday, December 2, 2015
On November 18th we hosted our webinar on “Tax-Aware Investing”. Thank you to our attendees -- tax managers, compliance officers, tax analysts, controllers, chief financial officers and accountants from hedge funds, hedge fund service providers and accounting & audit firms -- for participating in this event.
George Michaels, G2 FinTech Founder and resident authority on tax accounting of investment portfolios lead this webinar. Mr. Michaels began the presentation by defining tax-aware investing as the proactive use of the tax code to optimize after-tax results. To better illustrate how TAI works, throughout the webinar, Mr. Michaels likened TAI reports to a car speedometer that can alert you to the tax implications of your trades or car speed. Mr. Michaels also stated the obvious: in the world of taxes, losses are good because they can be net against gains.
Mr. Michaels discussed four different topics: Dividend Timing, Optimizing Disposition, Avoiding Constructive Sales and Working Around Tax Straddles. Although the purpose of the webinar is to educate the attendee on how to work with the tax code to achieve favorable after-tax investment results, Mr. Michaels did include some basic background information, including history, about different IRC sections. Similar to our other webinars, Mr. Michaels used real-world examples, some more complex than others, of trading activity to better illustrate his points.
During the Dividend Timing portion of the webinar, Mr. Michaels discussed how inadequate holding period is the most common cause of unfavorable tax treatment for dividends. He also discussed how hedges and partial hedges can trigger adverse tax effects and noted that it’s crucial to track both hedges and holding periods to achieve maximum investor return, dividends that qualify for the lower, long-term capital gains tax rate.
When discussing Optimizing Disposition, Mr. Michaels talked about instances when investors have different lots, bought at different times for different cost bases. He explained that in some instances, the obvious thing to do – sell the high-cost scenario (lots with the highest cost basis to get the most losses) might not be the best, tax-savvy choice because of certain taxable events, such as wash sales, which modify holding periods and can disallow losses. Mr. Michaels also used an example where the wash sale rule can actually benefit the investor.
During the Avoiding Constructive Sales section, Mr. Michaels noted that a TAI report can be especially helpful when a fund has different fund managers who are not always aware of each other’s trades. In one example, Mr. Michaels explains that the actions of two managers can trigger a constructive sale. For instance: Portfolio manager Bob wants to short ABC stock. Unbeknownst to him Sue, another portfolio manager, is already long that security, which carries an unrealized gain. Before Bob shorts ABC stock, at execution time, a TAI report notes the existence of the pre-existing long position. Since the long position has appreciated, the report indicates that shorting ABC stock would trigger a constructive sale. So, instead Bob writes a long-term, deep-in-the money call option on ABC. This does not trigger a constructive sale, as the call option is not substantially identical to the stock. In this example, Mr. Michaels noted that these transactions will result in a tax straddle, the topic of our “Tax Implications of Straddles” webinar.
When discussing Working Around Tax Straddles, Mr. Michaels explained what constitutes a tax straddle -- a pair of transactions that is created by taking two offsetting positions. One of the two positions holds long risk and the other is short. According to the tax straddles rule, if you have both realized losses and unrealized gains, the losses are disallowed. He used two examples to illustrate how TAI reports can inform investors when losses will not be recognized. He also noted that Qualified Covered Calls are exempt from the tax straddles rule.
During the Q&A session, attendees asked about qualified dividends and shares that have been lent out to someone else for short selling and how to determine the anchoring date for holding periods as related to wash sales.
To watch a video of the presentation or access a pdf of the power point file, please click here.
To read our blog on tax-aware investing, "Tax Alpha and the When Factor," please click here.