Simply put, is this legal: Let's say I had an IRA with $100K and a non-IRA brokerage account with $100K . My aim, for tax purposes, is to generate losses in the non- IRA account but have off-setting positions in the IRA. I would be selling OTM futures option premium in the IRA and buying the same contract in the non-IRA. (Let's say the options have a probability of <10 percent of going ITM. ) Yes, I risk an accidental taxable gain offset -- except for the taxes paid -- if the Non-IRA profits and the IRA loses. Small risk, it seems. But if the inverse happens, I get a taxable-deductible loss in the non-IRA and a tax-deferred gain in the IRA, no? One could effectively move funds into an IRA as easily as into any other account and trade tax-deferred, right? And with futures and futures options, no need to worry about it being used for margin in an IRA, because that is permissible. What am I missing here? An obvious law, I should be aware of? If it is not legal, what's the cite or if anyone has a clip of the code.
I must be missing something - why are the odds that the IRA account will profit and the non-IRA account holding the opposite position will lose an equal amt of money anything other then 50-50 given enough time? Asked another way, if you are sure that the IRA account will be profitable over then long run with a given strategy then it sounds like you have found an edge and you should trade that edge in both accounts, not offset one against the other. Or are you talking about some thinly traded option where you are both the buyer and seller on the exact same transaction using limit orders so that the option price is skewed in favor of the IRA account?
Well, to use casual short-hand and not a probability calculator, let's say you buy and sell the same way-OTM call, with a delta of say .09 with 30 days to expiration. You think that has a 50-50 chance of going ITM? Small premium, to be sure. But do this over and over .....
I explored this idea a few years ago and concluded that it sounds a lot like self dealing. It _is_ hard to find an authority on this kind of question. What my accountant had to say about it was vague. As far as I know, the IRS and the courts haven't provided specific guidance, so it's a question of circumstances, intentions, etc. Clearly your goal is to use your IRA to benefit a party other than the IRA. I think the IRS would take a dim view of this even if the opposing transactions are performed independently in liquid markets. In any case, I didn't want U.S. vs. Harry Lime to be the court case that clarifies the matter. http://www.trustetc.com/forms/sec4975.pdf http://www.aicpa.org/PUBS/JOFA/apr2000/preston.htm
I received a simliar vague reponse from an accountant (but not an authroity on taxes). His rationale was that the IRS had not deat with issues like this (my example plus other, such as wash sales using an IRA and non-IRA account) simply because it means opening up IRAs to annual reviews of capital gains and losses and matching them up with non-IRA accounts, a process that even the IRS, apparently, doesn't want to get involved in. So, the matter remains unclear. Like you, though, I'd rather not be the test case. Maybe Green Tax Trader or one of those services could help.
No, I'm not saying it has a 50-50 chance of going ITM, I'm saying if you do it enough times both accounts will break even (minus commission costs and spreads) assuming that the options are correctly priced. Given an option that is cheap and is a long-shot, say a 10% chance that it will be worth 10x its current price at expiration, you have two choices: sell the option and 9/10 times you keep the premium when it expires worthless (1/10 times you end up eating it big) or buy the option and 9/10 times you lose what you paid but 1/10 time you strike it big. Note these are all made up numbers but what I'm getting at is that the risk/reward is already priced into the option so I don't see how you could ever keep buying & selling the same option and expect anything but break even (or less minus spread/commission over the long haul) because otherwise you have found an edge that you could easily exploit. The only way I can see this work is if you skew the option price by buying and selling to/from yourself at a price that is away from the fair value price - is that what you intend to do?
I understand your skew scenario, but it's not what I am getting at. And I understand that the fat tail risk could wipe out profits of writing OTM options. But, let's sya, with two $100k accounts and collecting maybe $20 per $1,500 or so of margin. That is $1,200. How many months could use go moving that amount into the IRA before either it's all transferred or you have a winner on the long side, maybe big, maybe not. And is that so bad? Let's say you do this for six months. NO problem. You put $7,200 into an IRA, Plus you get a $7,200 tax loss. And you can still contribute your regular amount to the IRA. If getting your money into a tax-deferred account for the next 20-30 years, is a goal --a goal -- this sure expedites the conventional way, no?
I guess I just dont see how this will help you in the long run. As you point out, you might go quite a while writing OTM options before the first fat tail event wipes out your many small gains in the IRA (and possibly more depending on how soon into the process it happens) but it is pretty much assured that sooner or later it will happen so while you might get lucky for the short-to-mid term doing this over many years has no expectancy of accomplishing what you desire (transferring more money into the IRA). In addition, since you will be paying commission costs and the spread each time it seems like its destined to be a net loser overall. I like the idea of transacting with yourself more, of course that probably is a big no-no with the IRS.
Wouldn't this be considered a straddle for tax purposes and therefore prohibit any tax deduction? BTW my tax expertise is pretty low. Don
I see your logic; this is not a permanent long-term strategy, however; it is a short-to-medium term way to transfer taxable funds into a tax-deferred account. When the money is transferred, the program is over. If you had a small accoung maybe $25,000, you could so this in a few months. Then all of your money is in a tax-deferred account and you can go back to whatever strategy you want to use and the profits will be tax-deferred.