Disclaimer: I am not a lawyer, accountant or investment advisor. I have not tried this, and I’m currently trying to think of reasons why it won’t work.
How to Beat the Tax System:
Suppose one had an investment account and a Roth IRA. Suppose further the investment account had a realized gain for the year. From the investment account, one could sell-to-open a way out-of-the-money cash-secured put at a high limit that no one would buy. As long as you’re the only open interest, you could then buy your option in your other account. You’d in essence be swapping short-term gains for tax-free savings.
You’re hosed if another party rushed in to sell you the put at a lower price, but the savings could easily exceed the cost of commissions if the option is thinly traded enough. I suppose you could just take the market price on both sides, though, if you’re willing to repeat the process until the transition goes the “correct” way.
You can withdraw penalty-free from the Roth IRA when you buy your first house. Or, you could simply reverse the process as needed. This could be particularly helpful if one were having a bad year and had lost more than the maximum investment-losses deduction.
Any downsides to this bit of financial munchkin-ism? Does this constitute tax evasion? I imagine it wouldn’t be provable for anyone other than me (you’re welcome). Are there actually options that thinly-traded?
I am not a tax lawyer, but I suspect the IRS would treat the put-option sale-thingie as a deposit into your Roth IRA (“substance over form” is a recognized tax law doctrine, at least when it benefits the IRS). Likewise, reversing the process likely would be classified as withdrawing from the IRA. So, the general rules for deposits and withdraws from the IRA would likely apply. If I understand your suggestion correctly, the general rules would prohibit most of what you are trying to do.
In short, I don’t think your plan does what you think it does, legally speaking. Whether you would get caught and penalized is a separate question—First, brokerages have lots of reporting requirements, and likely would issue a 1099 or some-such to someone if there were a change in beneficial ownership of an asset. Second, the IRS has an all-but-declared policy of spending a dollar to collect a dime, purely for deterrence purposes.
In summary, aggressive tax techniques without expert guidance is asking for trouble.
Disclaimer to any reader: I am not your lawyer. I am not a tax lawyer. I didn’t do any legal research. Don’t rely on my opinion for any reason. Definitely don’t rely on this opinion to try and pay less taxes. If this is a real issue for you, hire someone to do the research, or do it yourself.
I know nothing about tax law, so this is an important disclaimer. I won’t end up trying this.
To spell out the idea, one could have their Roth IRA and their investment account at separate institutions. The Roth IRA broker would simply see a loss (gain) and the investment account broker would simply see a gain (loss). Each institutions reporting these changes to the IRS is the benefit of the finagling.
Yes, and the IRS would see both transactions under your tax identification number (for an individual, typically the social security number). The IRS is going to have an opinion about what that transaction means for your IRA account, and if your tax return is not consistent with that opinion, the IRS will expect an explanation.
Disclaimer to any reader: I am not your lawyer. I am not a tax lawyer. I didn’t do any legal research. Don’t rely on my opinion for any reason. Definitely don’t rely on this opinion to try and pay less taxes. If this is a real issue for you, hire someone to do the research, or do it yourself.
Disclaimer: I am not a lawyer, accountant or investment advisor. I have not tried this, and I’m currently trying to think of reasons why it won’t work.
How to Beat the Tax System:
Suppose one had an investment account and a Roth IRA. Suppose further the investment account had a realized gain for the year. From the investment account, one could sell-to-open a way out-of-the-money cash-secured put at a high limit that no one would buy. As long as you’re the only open interest, you could then buy your option in your other account. You’d in essence be swapping short-term gains for tax-free savings.
You’re hosed if another party rushed in to sell you the put at a lower price, but the savings could easily exceed the cost of commissions if the option is thinly traded enough. I suppose you could just take the market price on both sides, though, if you’re willing to repeat the process until the transition goes the “correct” way.
You can withdraw penalty-free from the Roth IRA when you buy your first house. Or, you could simply reverse the process as needed. This could be particularly helpful if one were having a bad year and had lost more than the maximum investment-losses deduction.
Any downsides to this bit of financial munchkin-ism? Does this constitute tax evasion? I imagine it wouldn’t be provable for anyone other than me (you’re welcome). Are there actually options that thinly-traded?
I am not a tax lawyer, but I suspect the IRS would treat the put-option sale-thingie as a deposit into your Roth IRA (“substance over form” is a recognized tax law doctrine, at least when it benefits the IRS). Likewise, reversing the process likely would be classified as withdrawing from the IRA. So, the general rules for deposits and withdraws from the IRA would likely apply. If I understand your suggestion correctly, the general rules would prohibit most of what you are trying to do.
In short, I don’t think your plan does what you think it does, legally speaking. Whether you would get caught and penalized is a separate question—First, brokerages have lots of reporting requirements, and likely would issue a 1099 or some-such to someone if there were a change in beneficial ownership of an asset. Second, the IRS has an all-but-declared policy of spending a dollar to collect a dime, purely for deterrence purposes.
In summary, aggressive tax techniques without expert guidance is asking for trouble.
Disclaimer to any reader: I am not your lawyer. I am not a tax lawyer. I didn’t do any legal research. Don’t rely on my opinion for any reason. Definitely don’t rely on this opinion to try and pay less taxes. If this is a real issue for you, hire someone to do the research, or do it yourself.
I know nothing about tax law, so this is an important disclaimer. I won’t end up trying this.
To spell out the idea, one could have their Roth IRA and their investment account at separate institutions. The Roth IRA broker would simply see a loss (gain) and the investment account broker would simply see a gain (loss). Each institutions reporting these changes to the IRS is the benefit of the finagling.
Yes, and the IRS would see both transactions under your tax identification number (for an individual, typically the social security number). The IRS is going to have an opinion about what that transaction means for your IRA account, and if your tax return is not consistent with that opinion, the IRS will expect an explanation.
Disclaimer to any reader: I am not your lawyer. I am not a tax lawyer. I didn’t do any legal research. Don’t rely on my opinion for any reason. Definitely don’t rely on this opinion to try and pay less taxes. If this is a real issue for you, hire someone to do the research, or do it yourself.