strategy for tax losses

[ERICOPOLY]

Moving to California, I have a desire to ensure that I'm not the one they turn to for fixing their budget mess.  My marginal tax rate on short-term capital gains will be well in excess of 40%.  But of course from time to time the best move is to trade a little (capturing some short term capital gains).  Of course, maybe not if you only keep less than 60% of the gain.

 

So what I need are some tax losses that aren't really losses.

 

This involves leverage to an already fully invested portfolio. The leverage is merely for the sake of manufacturing tax losses.

 

Idea:

1)  Buy Berkshire at today's price and that's where the leverage comes from

2)  Hedge the Berkshire holding 100% with deep-in-the-money SPY puts expiring December

3)  When the SPY puts expire, replace with DIA deep-in-the-money puts expiring following November

4)  When the DIA puts expire, replace with SPY puts expiring following October.

 

The point here is that over the long term, you are clearly going to beat the market.  You hold the Berkshire position "Forever", and over the long run take a short-term tax loss as the shorted index rises over the very long term.

 

So you profit in two ways:

1)  tax savings.  If Berkshire rises 10% and the index rises 10%, you about 4% gain through tax savings.

2)  Berkshire ought to beat the index over the long run.

 

Margin interests costs might be an issue, so perhaps this is just a way to take some losses this year (a heavy marginal tax year) and shift the offsetting gains to a future year (2013 or 2014).  I mention 2013 and 2014 because those are the years for which you can presently write deep-in-the-money BRK-B puts.

 

[ageofsocrates]

personally, i would just create a bvi entity to avoid taxes. Think the US tax code is deeply flawed.

[ERICOPOLY]

personally, i would just create a bvi entity to avoid taxes. Think the US tax code is deeply flawed.

 

That won't get me any relief.  I'd be hit with an "undistributed profits" tax if I intended this offshore company to be just a "personal holding company" for my passive investments.

 

I'd still need some sort of contrived losses to offset the undistributed profits tax.

[ERICOPOLY]

I wish somebody would offer a variable annuity with a "self directed" investment option.  Wouldn't that be cool.  In effect, it's just an IRA brokerage account at that point.

 

Did Fairholme ever get it's fund offered through AIG variable annuities?  That was discussed on this board more than a year ago.

[mhdousa]

I wish somebody would offer a variable annuity with a "self directed" investment option.  Wouldn't that be cool.  In effect, it's just an IRA brokerage account at that point.

 

Did Fairholme ever get it's fund offered through AIG variable annuities?  That was discussed on this board more than a year ago.

 

NY Life has something like this.  It's packaged as a life insurance plan but you can "borrow" against the plan.

http://www.nylamn.newyorklife.com/amn/v/index.jsp?vgnextoid=d51684345e6e6210VgnVCM1000001f3c1cacRCRD

 

The investment options (mutual funds) aren't great but there are some decent options.

 

[Uccmal]

I am so deep with US financial options that I think I am going to start making use of puts with the assumption that I will ultimately be losing the money and taking a tax loss on it.  I regret not hedging my gains from late March with puts on the KBW index, but hindsight is 20/20.  Of course there is no sense hedging now, since much of the worst has hit at least in the financials.

 

If things go to hell such as they have been I can then sell the puts at a gain, which I can live with.

[ERICOPOLY]

I've been on Fidelity's website today reading about their "Personal Retirement Annuity".  There is a 0.25% annual annuity charge, but if your contract is in excess of $1m then the charge is only 0.1%.  That 0.1% annual fee could quite easily be a much better deal than paying taxes on your gains every year.

 

Their pitch:

•  Tax-deferred growth potential of investment

•  Low annual annuity costs

•  Any earnings not taxed until withdrawn

•  The ability to invest as much as you want—no IRS contribution limits

•  Array of investment options, many rated highly by Morningstar®

 

Here is the list of funds:

http://fundresearch.fidelity.com/annuities/category-performance-annual-total-returns-quarterly/FPRAI

 

My complaint is that our tax laws have given this to us -- it's basically an unlimited-contribution IRA plan.  Why can't they just go the extra mile and let us make unlimited contributions to our IRA plans?

 

It's like the law was written by an insurance company.  I'll bet if somebody proposed to have unlimited contributions to IRA plans, the insurance industry would lobby hard to have the idea killed.

[SharperDingaan]

End the year with the same number of shares you started with, & trade down your cost base. The reduction is a tax free return of capital  ;)