I was on the Wall Street Tax Association "Developments in Tax Aware Financial Product Strategies" call yesterday morning, where two Treasury officials walked through their current anti-abuse focus areas, which included six things:
- In the ETF wrapper:
- §351 contributions to new ETFs and using in-kind redemptions to meet the original mandate and/or achieving tax-free diversification.
- Box spread ETFs converting would-be ordinary interest into indefinite deferral and capital gain on exit.
- Dividend-avoidance products that avoid only for the sake of tax.
- Private funds impacting ordinary income tax liability:
- Trader funds using swaps held for an ordinary deduction and terminated early for a capital gain.
- FX funds electing character after results: ordinary if it loses, capital if it wins.
- Funds using identified straddles to route capital losses into ordinary income reduction via basis.
Bloomberg wrote a nice summary of the two-hour panel here.
With the important caveat that I am an independent tax analyst, and that investors/advisers should consult credentialed professionals about any products and strategies they're considering, my reaction is that this is an opportunity to revisit allocator diligence processes.
That may seem boring and vague, but most of Treasury's points raised the question... is this real? Like, is this just tax shenanigans, or is there a legitimate, non-tax purpose for these transactions? That's the skepticism that allocators should bring to every pitch.
Treasury appeared open to arguments, but overall seemed in search of two critical things: