According to my CPA, I have a bunch of foreign tax credit carryovers from 2007 that expire after this year and I'm trying to find a cheap and risk-free way to use them, which will require me to generate some "foreign income" before the year ends. I do my trading within an LLC with mark-to-market accounting. The best idea I can come up with is buying EWU ahead of its December ex-dividend date and hedging against price movements in EWU by shorting FTSE 100 (not exactly the same index tracked by EWU, but probably close enough) futures, closing all positions on the ex-dividend date. I should then end up with the foreign dividend and a capital loss roughly equal to the dividend's value. Since EWU only invests in UK stocks, there shouldn't be any tax withheld from the dividend. If anyone has better ideas, I'd love to hear them.
So how do you realize the foreign tax credits? Because I don't see that happening... Also, if you originate the trades from your hometown brokerage, aren't you creating just normal income anyway? Where is home... USA?
As long as there is (1) enough total net income from the LLC to generate tax liabilities (which there is) and (2) there is some net "foreign" income, the foreign tax credit carryovers can be used. Note that the capital loss on EWU would *not* be "foreign", but I believe its dividends would be, meaning there would be positive net foreign income from the trades. I do need to confirm the foreignness of the EWU dividend, which I will do as soon as iShares opens in the morning. Yes.
I missed that you trade via LLC... my bad. Are you sure the dividends are foreign income? You should double check with tax-accountant. But it looks okay. You could also trade just a regular stock vs it's options, that's more delta neutral... Buy stock and buy deep ITM puts, deep enough for it to not have any extrinsic value. You get the dividend and afterwards you exercise the puts. But you probably pay dividend tax on that in the UK... which you might be able to get back via tax-treaty...? I don't know, depends on how much the credit is etc.
https://www.ishares.com/us/literatu...shares-distribution-summary-is-20079-0117.pdf page 40 column 16 suggests that 100% of EWU's 2016 divdends were foreign income for some US tax purpose, although I don't know if it works for your purpose and if this will be approximately the same for 2017. That file also lists plenty of similar ETF's, by the way.
Thanks toonerdy. It looks like EMB might be another good candidate. It's stable enough that hedging an overnight hold might not even be necessary. As for options, I haven't considered them for hedging because I've been assuming (without checking) that they aren't liquid enough and that transaction costs would therefore make them too expensive for this purpose. I need to invest about $1m overnight in an ETF in order to capture, say, $10k in foreign dividends so that I can make use of a few thousand dollars in foreign tax credit carryovers. (Yep, that's a lot of money to sling around chasing a few thousand bucks.) If the ex-dividend drop is even just a few thousand dollars more than the dividend value, then I lose. I'm not an options trader, but I would imagine that they just aren't liquid enough for the kind of micro-hedging I need. I'm not a bond trader either, but are there any high-yield foreign bonds that can be bought right before maturity with one interest payment left? I'd have to check with my CPA, but I believe the interest payment would be foreign income while the capital loss on the bond maturity would not be, so I would be left with net foreign income.
EZU looks like another candidate. If I can find enough very liquid ETFs paying foreign dividends with low tax rates before the end of the year, then I don't need to worry about hedging, since the capital losses will tend to average out to the total dividends captured.
Okay, so what is the total tax credit? 10k in dividends mean you cover a credit of what... 3k? That ETF play is way to big for this. If you trade a liquid stock that pays a decent dividend you're better off doing that. Assuming you need 10k in dividends, that's a position of 250k in a stock that pays 4% dividend. You might have to pick one that pays half yearly dividends though... I assume you need it done before end of the year? Also, usually the dividends are discounted, which means you can 'buy' the dividend quite cheap... at say 80-90% of the payout. There are plenty of liquid stocks out there that have liquid options... so should be no problem. Do you need to get the dividend on a UK stock or can it be on another one? Also... again, you should look at what the dividend tax rule is locally. For instance, in the Netherlands you get the net dividend, so tax is withheld... this means you would actually lose on a trade like this if you can't apply for tax refund through tax treaties...
Finding a highly liquid stock in the right tax jurisdiction (UK, UK Virgin Islands, Bermuda, Hong Kong and Brazil have zero dividend withholding taxes; China, Mexico and a few other countries have withholding rates of 10% and below) that is paying a 4% annual or special dividend before the end of the year is easier said than done. I'll pay a finder's fee to anyone who can! I don't think I can hope for more than about 1% in dividends per trade, whether it's an ETF, ADR or ordinary common or preferred US-listed foreign share. My thinking right now is to just break it all up into a bunch of smaller trades targeting different dividends so that averaging works in my favor. I.e., I'll lose on some trades, gain on others, but overall, they should come out a wash, with about $X in foreign dividends and -$X in capital losses. I think my first target will be Unilever. I'll have to look at the spreads on deep ITM puts while the market is open, but I don't see how that price protection isn't going to cost me.
Royal Dutch pays about 1.5% Ex-div is 8th Nov.... Don't know how the options are on the LSE. I don't have a datafeed from LSE.. but if you do and can get a screenshot of intraday Nov 17 options I can work something out for you, see if it's doable or not. I still think it could be a less costly way to do stock+puts if you can get a decent price... you would need to do about 30.000 shares and 300 options... doesn't seem too much of a big deal in RD.