Trading intraday, HFT - spot vs. future - tax consequences

Discussion in 'Taxes and Accounting' started by blink18, Apr 3, 2021.

  1. blink18


    I was reading this academic paper on distinction between spot and future transactions. It says that if trades with stocks occur intraday (and are not held till the end of the day), it should be considered as future transactions and not spot transactions (physical delivery, clearing and settlement are not made).

    How does IRS deal with intraday or HFT trading when positions with stocks are opened and closed intraday? Do they say - delivery was not made, settlement was not made, cash was not exchanged? Or do they say it doesn't matter - it's treated the same as stock that was bought today and sold 3 months later?

    Excerpt from the paper:

    "Therefore, if high-frequency trades are to be understood as trades that are agreed upon but never paid for and delivered, they can no longer be understood as spot transactions and can conceptually be defined more meaningfully as future transactions. Future transactions differ from spot transactions in that they are agreed in the present but paid for and delivered at a future date, so that the time lag between the agreement on prices and quantities on one side, and the clearing and settlement on the other, is no longer irrelevant for economic and legal theory. In terms of property rights, spot and future transactions are different in esse. Spot transactions are the exchange of property rights over present goods, whereas future transactions are the exchange of claims on property rights on future goods.

    If it is clear that high-frequency trades are to be considered as futures, what about trading positions that are kept open until the settlement date, i.e., transactions that will indeed be paid for and delivered? An important issue to highlight is that nothing makes it possible to distinguish ex ante a high-frequency trade from any other trade. When a buy or sell order is executed on the market (“execution” here referring not to the fact that a trade is paid for and delivered, but merely to the fact that a buyer is matched with a seller, i.e., that an agreement on prices and quantities is reached), nothing makes it possible to identify trades of two different types as there cannot exist prescience, at least for an external observer, about whether the position will be liquidated or not before the settlement date. All trades are potentially high-frequency trades ex ante. When there is no real-time settlement, all trades must therefore be regarded as futures in the first place, so as to account for the institutional lag between the time of order execution and the time of clearing and settlement. Indeed, the possibility that a particular trade be high-frequency always exists before the settlement time. In this context, trading positions that are left open over at least one settlement date can be considered similar to future contracts that are kept until maturity, whereas trading positions that are liquidated before settlement date are akin to future contracts that are never delivered."
  2. BMK


    This is an interesting philosophical discussion. But the IRS has always used the trade date--not the settlement date--as the date on which a stock is bought or sold for tax purposes.

    I have not read the entire paper, but I did read the excerpt that you posted here. And I have some observations:

    Unless you are talking about trades that occur during the last few days of the year, for which the settlement date would be in the following year, what difference does it make? Regardless of whether you use the trade date or the settlement date, you're still going to have a short-term gain or loss, within the same year.

    The distinction between spot and futures transactions has a very specific meaning in the context of commodities like gold and crude oil. I don't see how this distinction is relevant when it comes to equities.

    The author appears to be engaged in a purely academic discussion of property rights, and some very technical legal questions, e.g., if the purchase and sale occur twenty minutes apart, and the settlement of both transactions takes place simultaneously 24 hours later, then did the trader ever really own the stock at all? Or did he just reach an agreement to collect (or pay) the difference in price?

    And it is an interesting question in terms of legal theory, and what it means to actually own shares of stock.

    It is worth noting that it is indeed the settlement date that determines whether you own shares when it comes to collecting dividends.

    But for reporting gains and losses for US tax purposes, the IRS clearly instructs taxpayers to use the trade date. When it comes to determining the holding period, i.e., whether the gain is short-term or long-term--it is the trade date that is used--not the settlement date.

    One final observation: If a day trader buys a stock at 11:00 AM and sells it at 1:00 PM the same day, and both transactions settle simultaneously the next business day, or two days later, it is tempting to argue that the trader never really owned the stock, because it was never delivered. He merely reached an agreement to collect or pay the difference in the price of the stock at 11:00 AM and at 1:00 PM.

    That sounds great on paper in a philosophy class. But in the real world, who did he reach an agreement with?

    The guy who sold the stock to the trader at 11:00 AM is probably not the same guy who bought the stock from him at 1:00 PM. The guy who sold it to him at 11:00 might have been holding it for two years, and the guy who bought it from him at 1:00 PM might decide to hold it for four days...

    You're not "playing against the house." There is not one single counterparty handling all transactions.

    As I skim through the summary of the writing at the link you provided, it appears that the author is concerned primarily with naked short selling, and other highly technical, theoretical issues associated with HFT. In other words, are high-frequency traders selling things that don't really exist, because they know they will never have to deliver the goods?

    blink18 likes this.
  3. Ill be honest, unless Green Trader Tax agrees with this article, then who gives a fuck. That dude is an authority on Taxes and Trading.

    You people, and by that i mean most people nowadays, put too much emphasis on the endless studies that are out there. Learn to be pragmatic with life instead of listening to some nerds opine - you will get farther.

    Not to mention most people that like to quote studies have no idea how to read one or sift through the information to determine what the study is really saying.
  4. BMK


    I don't think Green Trader Tax would find anything in that article to agree with or disagree with. The article is about HFT. It is not about the tax treatment of HFT. The word tax does not appear anywhere in the article.

    The author of the original post appears to be trying to apply some of the ideas in the article to the tax treatment of day trading in the US. But the article itself says absolutely nothing about taxation.

  5. Then its literally a useless fuckin thread.