I've seen a lot of people talk about the IB Friend's & Family account and have tried to find some information out independantly, but was hoping I could get some quick answers on here for some gray areas. 1. It's my understanding that each sub-account will be responsible for their own taxes. If capital gains tax only applies to long-term trades, and the client's account is used to make short-term to mid-term trades, then each client will be taxed on the account's gains at their individual income level. Correct? If so, how would this type of SMA be more tax efficient than if the client invested in mutual funds? I have some more questions, but wanted to get a guage on if I would receive honest and serious answers first. Thanks in advance.
SMA is very simple. The investor opens an account in his name or entity. He can authorize anyone to trade on his behalf, but your broker must be provided information on that person's identity. There is no difference tax wise or with regard to any other issues for him if you trade his account or he does. If you receive a fee for trading his account, you might have to registered as either a RIA or CTA depending on the situation and the state you live in.
thanks for the quick respone. I understand all of these things that you have mentioned already. What I am wondering, and maybe I didn't phrase it the right way, is how would you explain the tax benefits of someone investing in a SMA rather than a Mutual Fund if the capital gains tax rate did not apply due to the securities in the SMA never being held for more than a year? I'll probably have to call a specializec tax advisor about this, but wanted to see if anyone on here might have some first-hand experience in SMA's and dealing with tax questions from their clients.
You're providing a service to your investor though SMA rather than a hedge fund or Mutual Fund. You need to show him your strategy is worthy of your fees. Also, with SMA, there is complete transparency of all trading. He will see everything the next day, because it is his account. He can also end the relationship at anytime. Also, with Mutual Funds, he will pay taxes on unrealized gains/losses by him, just because the fund takes gains and losses.