Author Topic: capital gains - avoid  (Read 4425 times)

maybe4less

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Re: capital gains - avoid
« Reply #10 on: January 11, 2018, 11:43:49 AM »
I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.


rpadebet

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Re: capital gains - avoid
« Reply #11 on: January 11, 2018, 01:42:29 PM »
If puts expire in the money, aren't you now exposing yourself to short term capital gains rate instead of the favorable long term rate at a time when your stock itself is down?

Some of the companies we buy stay undervalued for years but don't we hold those hoping undervaluation would be cured?
On the flip-side isn't it ok to have over-valuation persist for a while too?
Why not let some good luck offset some of our bad luck.

We are not all Malone genius. Investing is complex enough as it is without introducing this new tax dimension
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benchmark

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Re: capital gains - avoid
« Reply #12 on: January 13, 2018, 10:20:07 PM »
I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

Removing cash from the account by borrowing on margin -- is that only applicable to the portfolio margin account? can't you simply do it with the reg-T account?

compoundinglife

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Re: capital gains - avoid
« Reply #13 on: January 14, 2018, 12:12:53 AM »
I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

Removing cash from the account by borrowing on margin -- is that only applicable to the portfolio margin account? can't you simply do it with the reg-T account?

Sure you can borrow cash on margin from a reg-T account. But reg-T does not take hedging into account when calculating your margin equity so you either borrow much less or increase your risk of getting called. In theory with portfolio margin and a hedged position you could set it up so that massive drop in the stock price does not change your margin requirements. I say in theory because I never used portfolio margin so I don't know the little details.

plato1976

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Re: capital gains - avoid
« Reply #14 on: January 14, 2018, 04:04:52 PM »
What if your father just sends this to you as a gift?
Then your father has a life-time 5m-10m gift untaxable, and your new basis is the current price so you can sell without incurring capital gain

right?


My elderly father has several million of 3M in taxable.

I'm convinced it is ~20% overvalued:


Yes, 3M is (grossly) overvalued beyond any reasonable doubt.

https://seekingalpha.com/article/413253 ... ke-mistake

3M Is Overvalued.

https://seekingalpha.com/article/413241 ... ter-prices

   Using several valuation models, I find that 3Mís stock price is overvalued...

https://seekingalpha.com/article/413013 ... gs-bargain

   ... 3M's stratospheric valuation.

https://seekingalpha.com/article/412728 ... may-coming


What to do about it?

I'd shift to (fairly valued) BRK, but selling will incur a 20% LTCG tax (the +3.8% has gone away, yes?).

Should I consider the overvaluation to make the tax "free"? Or does the tax make the overvaluation "free"?

Bearing in mind step-up basis would allow later selling without any tax hit, any thoughts?

Thanks.

globalfinancepartners

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Re: capital gains - avoid
« Reply #15 on: January 14, 2018, 04:44:59 PM »
not to discourage someone giving him several millions dollars but his basis would still be his dad's basis

bookie71

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Re: capital gains - avoid
« Reply #16 on: January 14, 2018, 06:11:52 PM »
Quote
not to discourage someone giving him several millions dollars but his basis would still be his dad's basis


Did the new tax law do away with the step up in basis on death?  On the old tax law a gift is valued at the donor's cost basis, but at market value if passed on at death (inherited)
Always remember, Pigs get fat and hogs get slaughtered.

maybe4less

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Re: capital gains - avoid
« Reply #17 on: January 14, 2018, 09:47:05 PM »
Quote
not to discourage someone giving him several millions dollars but his basis would still be his dad's basis


Did the new tax law do away with the step up in basis on death?  On the old tax law a gift is valued at the donor's cost basis, but at market value if passed on at death (inherited)

The step-up basis on death for inherited property still exists. However, I believe there is still no step-up for property gifted by someone who is living.

bookie71

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Re: capital gains - avoid
« Reply #18 on: January 15, 2018, 09:04:28 AM »

That's what I said.  Donor is the gifter.
Always remember, Pigs get fat and hogs get slaughtered.

globalfinancepartners

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Re: capital gains - avoid
« Reply #19 on: January 15, 2018, 03:12:39 PM »
Yeah - I was referring to the post above mine:

Quote
What if your father just sends this to you as a gift?
Then your father has a life-time 5m-10m gift untaxable, and your new basis is the current price so you can sell without incurring capital gain

right?

It doesn't really solve the "currently slightly overvalued" issue to wait until someone dies.