VPF + tax-aware long/short for diversifying concentrated stock

Plenty more content coming on this strategy...

What I’m reading…

AQR: Strategies to Diversify Low-Basis Stock

AQR: A Brief Guide to Pricing and Taxation of Variable Prepaid Forwards

AQR: Combining VPFs and Tax-Aware Strategies to Diversify Low-Basis Stock

Bob Gordon (2001): Wall Street Secrets for Tax-Efficient Investing

Tax Foundation: “Big, Beautiful Bill” Senate GOP Tax Plan

Eide Bailly: Washington State Increases Estate and Capital Gains Taxes

Perkins Coie (2023): Washington Capital Gains Tax: More Questions, Tentative Answers

VPF + Tax-Aware Long/Short for diversifying concentrated stock

Tax-aware long/short + variable prepaid forward is 🤯 for diversifying low-basis stock. Here's how it works:

t = 0
• Pledge shares; set delivery collar (e.g. 15 pt window)
• Receive ≳ 90% cash loan; no tax event
• Invest in tax-aware long/short

0 < t < T (maturity e.g. 2 years)
• Hold shares; receive dividends (taxed on receipt)
• Handle margin calls if price drops below haircut
• Loan accrues interest at negotiated financing rate
• Tax-aware long/short generates alpha/capital losses

t = T
• Deliver shares (cash top-up) within collar limits
• Pay accrued interest
• Realize deferred gain = prepayment – tax basis
• Tax-aware long/short offsets deferred gain (and some)

AQR research conclusion (see image)...
"𝘸𝘦 𝘥𝘰 𝘯𝘰𝘵 𝘧𝘪𝘯𝘥 𝘤𝘰𝘯𝘤𝘭𝘶𝘴𝘪𝘷𝘦 𝘦𝘷𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘩𝘢𝘵 𝘢 𝘝𝘗𝘍 𝘤𝘰𝘮𝘣𝘪𝘯𝘦𝘥 𝘸𝘪𝘵𝘩 𝘢𝘯 𝘪𝘯𝘥𝘦𝘹 𝘧𝘶𝘯𝘥 𝘰𝘳 𝘢 𝘥𝘪𝘳𝘦𝘤𝘵-𝘪𝘯𝘥𝘦𝘹𝘪𝘯𝘨 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘺 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘴 𝘢𝘯 𝘶𝘱𝘧𝘳𝘰𝘯𝘵 𝘴𝘢𝘭𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘴𝘵𝘰𝘤𝘬 𝘢𝘯𝘥 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘴𝘢𝘭𝘦 𝘱𝘳𝘰𝘤𝘦𝘦𝘥𝘴 𝘪𝘯 𝘢𝘯 𝘪𝘯𝘥𝘦𝘹 𝘧𝘶𝘯𝘥. 𝘐𝘯 𝘤𝘰𝘯𝘵𝘳𝘢𝘴𝘵, 𝘢 𝘝𝘗𝘍 𝘤𝘰𝘮𝘣𝘪𝘯𝘦𝘥 𝘸𝘪𝘵𝘩 𝘭𝘰𝘯𝘨-𝘴𝘩𝘰𝘳𝘵 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘳𝘦𝘴𝘶𝘭𝘵𝘴 𝘪𝘯 𝘢 𝘴𝘪𝘨𝘯𝘪𝘧𝘪𝘤𝘢𝘯𝘵 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘶𝘱𝘧𝘳𝘰𝘯𝘵 𝘴𝘢𝘭𝘦 𝘢𝘯𝘥 𝘳𝘦𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵 𝘰𝘧 𝘱𝘳𝘰𝘤𝘦𝘦𝘥𝘴 𝘪𝘯 𝘢𝘯 𝘪𝘯𝘥𝘦𝘹 𝘧𝘶𝘯𝘥."

AQR: Liberman, J., & Sosner, N. (Spring 2025). Combining Variable Prepaid Forwards and Tax-Aware Strategies to Diversify Low-Basis Stock. The Journal of Wealth Management, 27(4).

I’m building a tax-aware long/short visualizer

Most folks haven’t heard of tax-aware long/short. Those who have could probably use a hand ramping on the details and explaining to clients.

This should help people understand, for instance, the impact on cost basis following loss harvest and why long/short doesn't easily lock up like long only.

Shown: 150/50 using correlated geometric brownian motion, 500 long positions, 250 positions in each extension, equal.

¡¡¡Definitely not backtest or simulation quality!!!

Purely for explaining portfolio and tax mechanics. It’s an educational tool.

Washington State capital gains increases

Planning opportunity for WA-focused advisers…

WA State capital gains

Notes (See Perkins Coie 2023)

• WA taxes federal net LTCG only; short-term gains/losses ignored

• Grantor CRUTs pass through LTCG to you (taxable even if undistributed)

• Nongrantor CRUTs unclear—no DOR guidance; audit risk on trust vs. grantor status

• CRUT payouts don’t qualify for WA’s charitable-deduction offset

• Only individuals pay WA CGT; true non-grantor trusts/estates may avoid it

Additional quirks:

• §1256 contracts: WA may tax the 60% “long-term” portion even if held <1 yr

• QSBS gap: No carve-out for §1202-excluded gains: likely taxed

• Loss carryforwards: Only federal LT loss carryforwards apply; no WA-only system

• Small-biz deduction: Family-owned business gains fully deductible per entity, no cap

• DAF gifts: Donor-advised fund donations don’t qualify for the $100K offset

• Pre-2022 sales: Installment gains before Jan 1 2022 exempt; related loss carrybacks added back

Yes, it says 42. No, it wasn’t even close to the strike zone.

batter puzzled

Beastmode

Name the movie

TGIF.