Invest in fund in tax advantaged way?
I have some options to invest my own money in my fund which I would be interested in if it weren’t for the tax implications. It appears gains will count as income which makes the proposition far less appealing. Are there smarter ways to do this? Do any of you invest in your funds even with the tax liability implications?
Invest out of Roth if that is an available option. Or borrow on margin to invest, if they are doing a mark to market election like most, taxes are effectively just a vol reduction because losses can also be deducted against ordinary (W2) income.
It's extremely hard to avoid paying the income taxes. In some select cases and if you're HNW, you can dodge taxes by investing via a life insurance structure, but it has to be arranged by a private banker that has access to the fund and there'll be fees involved.
TLDR, it's near impossible not to pay taxes.
Is it worth it to invest in the fund if it seems like you’ll just have to pay the taxes? This will probably return 10-15% every year pre tax. I am attracted to the lower vol nature of it but also giving up 40% of the gains to taxes seems dumb..
Yes, just think about that as a vol reduction. If the fund is up 10%, you earn 5% after tax. If the fund is down 10%, you only lose 5% after tax, the other 5% in losses you earn back from claiming the 10% loss as a tax deduction. So you can (carefully) apply leverage to solve for that.
This is because most funds file the trader election, and opt for mark to market treatment, which converts all of their gains to ordinary income / losses. Hedge funds investments are also always in the "active participation" category so you can deduct those losses from your regular wage income. Not sure who gave me a MS for this above but happy to debate them, I have a lot of my PA invested in hedge funds.
Obviously be careful about the risk profile of the fund. You can borrow on margin from Interactive Brokers at SOFR + 75bps to invest, and if you are deploying in a low volatility multi-strategy fund, borrowing ~20% against a well diversified asset allocation mix (equity + bond indexes) is quite safe to do. That interest to IB can also be deducted against investment income.
If the fund is net long and low turnover that is a different story, but usually they aren't filing mark to market so they have capital gains and not ordinary income treatment, in which case there is a lot you can do to defer paying taxes on those gains.
Thanks helpful. My old fund sorted out 2x leverage for you to effectively solve this problem but my current one does not.
it’s crazy that it’s not taxed as capital gains and income instead since if fund went down you lose your money
Ratione qui nobis dicta est repudiandae qui. Est veniam iure molestiae ut velit corrupti.
Optio in ad ea. Ut quia deserunt dolorum voluptatum voluptatem id.
Et et eligendi ut a non non libero tempora. Qui maxime occaecati doloremque nostrum. Dicta sit ex excepturi quidem in.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...