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Non-Tech : Paired Trades and Hedging Strategies -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (79)	1/15/2005 12:26:32 PM
From: Biomaven	Read Replies (1) \| Respond to of 136

Without rules like wash sales and straddle rules, sophisticated investors need never pay capital gains - gains can just be successively pushed off until the following year until the investor finally dies, whereupon their heirs get a step-up in basis. In fact you can still do something along these lines - it's just harder and not quite as certain. Assume you have a bunch of gains to shelter one year. A month or so from year-end, you start two positions that are very strongly negatively correlated, but not considered a straddle by the IRS. Say long 50 random stocks in the S&P 100 and short the other 50 (perhaps with options positions to gain leverage). Unless you are very unlucky, the positions will move in tandem, but in opposite directions - you take your loss in the one position to offset your earlier gains, but maintain the offsetting winning position, which you only close out early in the new year. Voila - you just shifted your gain from one year to the next. Repeat each year until you die or have a bad year in the market. Note this doesn't work by taking positions in broad-based index options, because these get marked-to-market at year-end. Peter

To: TimF who wrote (79)	1/15/2005 10:02:29 PM
From: Ira Player	Read Replies (1) \| Respond to of 136

The basis for the new position will be at a lower cost so when taxes are eventually paid on it they potentially could be paid on a higher profit. The basis of the new position is moved upward, placing the new position at a loss equal to the loss negated by the wash rule. It is break even. By the way, another one that gripes me... Government publications and the long term capital gains treatment indicate a overt bias toward long term investment. However, I cannot deduct all margin interest on borrowing used to maintain a long term investment, unless I generate gains (or dividends) equal to or greater than the deduction. They force me to take gains or I must postpone the deduction. This is a covert bias toward short term thinking. Ira