It is called a "payment-in-kind", which is always taxable at the real value of the good or service that was received.
I haven't personally done it. I don't doubt it's hard to find someone who will allow it, although my read of an IRS private letter ruling on it is that it isn't legally prohibited (http://www.irs.gov/pub/irs-wd/201434024.pdf). Like you I'd be interested to hear from anyone who has had any success in this.
That is an interesting letter ruling, but it does not specifically address selling short stock in an IRA. The ruling is about a charitable remainder trust. It is relevant in the sense that the IRS appears to support the idea that borrowing stock is not a form of "indebtedness," as that term is used in a very specific context in the law, and it also supports the position that income derived from the short sale of stock is not "unrelated business income." But the ruling does not discuss IRAs at all. My guess is that most, if not all brokers, simply will not allow shorting stock in an IRA because it requires a margin account, and there is a general rule that you cannot use assets in an IRA as collateral for a loan. Even if borrowing stock is not a prohibited loan, the brokers simply don't want to set up an account that has margin capabilities in an IRA. Plus there is the risk of a margin call if the shorted stock rises, which can create a real nightmare. Meeting the margin call by depositing additional money could result in excess contributions. But if don't meet the margin call, and the broker liquidates the position, you could have a negative balance. Curing the negative balance would also require depositing additional money, which could still result in excess contributions. BMK
I agree with everything you said. That said, there is a way to set up an IRA to buy art and real estate, so I'm guessing there are some creative attorneys/accountants out there that have figured it out?
I am familiar with various firms that act as custodian for a self-directed IRA, and they allow investments in almost anything that is not self-dealing, e.g., you can use funds in your IRA for private mortgage lending, or to buy an interest in an LLC that owns a restaurant or a pawn shop. So, yes, you can get pretty creative. But to short stock, you would still have to find a broker-dealer willing to do it. I don't know if there is one out there. I'm pretty sure you can trade futures in an IRA, and short vertical call spreads... and of course you can buy an inverse ETF. BMK
Interesting timing of that letter, Sig. When I really pushed this with advisors, it was March 2014. That said, the big objection (as BMK stated) was: Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. So, not sure that letter would change things, but it sure sounds like the IRS would be ok with it. For whatever it's worth, the structure I wanted to use was a multi-member LLC that was jointly owned by my personally owned S-Corp and my IRA. BMK, I don't think the broker would be an obstacle here since it's just an LLC account to them. I think I've found a guy that is comfortable setting this up with margining/shorting; I'll PM you guys if I find the time to do a consult with him.
I'll be interested to know if are able to make it work, thanks in advance for the updates. One caveat about the private letter ruling is that it technically only applies to the entity it was written to, but they are commonly used as a gauge for what the IRS' thinking is on a subject.
You might do this, but don't forget about all of the controls that will come with this kind of action. Suppose something like that had been that easy to do.
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