{"componentChunkName":"component---src-templates-news-index-tsx","path":"/news/post2/","result":{"data":{"mdx":{"body":"var _excluded = [\"components\"];\n\nfunction _extends() { _extends = Object.assign ? Object.assign.bind() : function (target) { for (var i = 1; i < arguments.length; i++) { var source = arguments[i]; for (var key in source) { if (Object.prototype.hasOwnProperty.call(source, key)) { target[key] = source[key]; } } } return target; }; return _extends.apply(this, arguments); }\n\nfunction _objectWithoutProperties(source, excluded) { if (source == null) return {}; var target = _objectWithoutPropertiesLoose(source, excluded); var key, i; if (Object.getOwnPropertySymbols) { var sourceSymbolKeys = Object.getOwnPropertySymbols(source); for (i = 0; i < sourceSymbolKeys.length; i++) { key = sourceSymbolKeys[i]; if (excluded.indexOf(key) >= 0) continue; if (!Object.prototype.propertyIsEnumerable.call(source, key)) continue; target[key] = source[key]; } } return target; }\n\nfunction _objectWithoutPropertiesLoose(source, excluded) { if (source == null) return {}; var target = {}; var sourceKeys = Object.keys(source); var key, i; for (i = 0; i < sourceKeys.length; i++) { key = sourceKeys[i]; if (excluded.indexOf(key) >= 0) continue; target[key] = source[key]; } return target; }\n\n/* @jsxRuntime classic */\n\n/* @jsx mdx */\nvar _frontmatter = {\n  \"title\": \"How to Minimize Taxes On Your Investment\",\n  \"author\": \"Bart DeCanne\",\n  \"description\": \"It’s all about IRA, Section 1256, wash sales, and PTET!\",\n  \"date\": \"2023-04-07\",\n  \"images\": [\"blog-1.jpg\"],\n  \"tags\": [\"optionagent\", \"fund\", \"taxes\"]\n};\nvar layoutProps = {\n  _frontmatter: _frontmatter\n};\nvar MDXLayout = \"wrapper\";\nreturn function MDXContent(_ref) {\n  var components = _ref.components,\n      props = _objectWithoutProperties(_ref, _excluded);\n\n  return mdx(MDXLayout, _extends({}, layoutProps, props, {\n    components: components,\n    mdxType: \"MDXLayout\"\n  }), mdx(\"h3\", null, \"How to minimize taxes on your OptionAgent investment\"), mdx(\"h2\", null, \"It\\u2019s all about IRA, Section 1256, wash sales, and PTET!\"), mdx(\"br\", null), mdx(\"p\", null, \"I write this blogpost on April 7 2023, roughly a week before the US tax filing deadline. So here\\u2019s a reflection on how OptionAgent helps to minimize taxable gains on your fund investment, and extra steps you can take to further improve your tax situation.\"), mdx(\"br\", null), mdx(\"p\", null, \"Of course it has to be stated upfront that for tax reasons an investment in the fund\\nfrom a retirement account (IRA or Roth IRA) is the ultimate best. While an IRA can\\nallow invested money to grow tax-free and only incurs a taxation at the time of a\\nqualified withdrawal, a Roth IRA can even avoid taxation at the time of a qualified\\nwithdrawal, making all capital gains over the full lifetime of the account tax-free.\\nA comparison of both can fill (more than 1) article by itself, so suffice to say\\nhere that it is possible to invest (Roth) IRA money into our fund. But likely, if\\nyour IRA custodian is a large financial institution, they won\\u2019t provide you the option\\nto invest in a private hedge fund. The solution is to open a \\u2018self-directed IRA\\u2019\\nwith a specialized trust custodian, do a tax-free rollover of (some of) your IRA\\ncash, and then instruct the new custodian to invest in our fund. As an investor you\\ncan have separate taxable and tax-free capital accounts in the fund simultaneously.\\nBoth are accounted for separately with the IRA capital account growing tax-free.\\nWe can refer any investor to one of several self-directed IRA custodians we have\\nworked with already to successfully setup such investments in our fund.\"), mdx(\"br\", null), mdx(\"br\", null), mdx(\"p\", null, \"In the remainder here we\\u2019ll just consider the case you are investing from a taxable\\naccount.\"), mdx(\"br\", null), mdx(\"br\", null), mdx(\"p\", null, \"All investors in the fund are limited partners in the Fund\\u2019s Limited Partnership\\n(OptionAgent Capital Partners LP) legal entity. This means any gains from the fund\\nto the investor are received out of the LP entity. The LP entity files an informational\\ntax return each year to report the aggregate capital gains and the distribution to\\neach limited partner based on their % participation in the fund. But since a Limited\\nPartnership legal entity is a pass-through entity for taxation, the fund itself does\\nnot pay taxes on the gains of each investor. Rather, next to the \", mdx(\"a\", {\n    parentName: \"p\",\n    \"href\": \"https://www.ftb.ca.gov/forms/2022/2022-3804-cr.pdf\"\n  }, \"Form 1065\"), \"\\nfiled by the fund as part of its informational tax return, we provide a Schedule\\nK1 to each investor outlining their share distribution from the partnership. The\\ninvestor is then to report this as part of their own tax return.\"), mdx(\"br\", null), mdx(\"p\", null, \"Now you may reasonably think, since the fund follows a very active trading strategy\\nin financial call & put options, that fund taxation is based 100% on short-term realized\\ncapital gains, taxed at the tax payer\\u2019s marginal tax rate. However that\\u2019s not the\\ncase. The OptionAgent fund invests typically (and actually exclusively to date) in\\nthe kind of options that are traditionally used by institutional investors to hedge\\nexisting equity portfolios. Probably because of very successful lobbying by the finance\\nindustry in the past, the IRS has a special designation for these type of financial\\ninstruments: \\u201CSection 1256\\u201D contracts.\"), mdx(\"br\", null), mdx(\"p\", null, \"Rather than being taxed based on realized gains, these contracts are taxed \\u201Cmarked-to-market\\u201D.\\nLiterally it means that taxation occurs based on the comparison of the aggregate\\nvalue in the portfolio of these contracts at the end of year vs start of the year.\\nSo yes the bad news is you are taxed on both realized and unrealized capital gains.\\nBut the much better good news is that no individual sales are reported, only the\\nannual aggregate gains, AND that those aggregate gains are always taxed at a 60%\\nlong-term rate and 40% short-term rate, irrespective of the holding period of any\\nposition within the portfolio of \\u2018Section 1256\\u2019 contracts!\"), mdx(\"br\", null), mdx(\"p\", null, \"Secondly, again since no individual sales are being tracked, wash sale rules do not\\napply. A wash sale results when a sale of a financial instrument is followed by a\\npurchase of a fundamentally similar instrument less than 30 days later. This would\\noccur very frequently in any active trading strategy. The wash sale rule limits the\\nability to take long-term capital gain losses even when an asset was held for over\\na year. As wash sales ripple through the year (eg if you use a covered call strategy\\nwhere each month you sell a new covered call on the same underlying stock) it is frequently\\nthe reason why portfolios need to revert to cash towards the end of the year, and\\nkeep it in cash until end of January of the next year, as the 30-day rule is both\\nforward and backward-looking. But again, no individual sales reported with \\u2018marked-to-market\\u2019\\nso no wash sale reporting either for OptionAgent!\"), mdx(\"br\", null), mdx(\"p\", null, \"The 60/40 tax treatment can make a huge difference for an investor\\u2019s federal tax\\nfiling (many states such as California do not have a lower tax rate for capital gains\\nso then there is no advantage for the state tax filing). Let\\u2019s take an example of\\na $100,000 gain in the fund for an investor at the highest 40.8% (37% + 3.8% tax on net investment income) bracket and\\nlikely then also with a 23.8% (20% + 3.8% on net investment income) long-term tax\\nrate: the investor would pay $30,600 ($60Kx0.238+$40Kx0.408) in federal taxes on those\\n$100K gains from OptionAgent, while a similar (realized) gain from a similar active\\ninvestment strategy in other instruments would result in a $40,800 tax bill. That\\u2019s\\na savings of over $10K, or 25% (=10.2/40.8), annually in federal taxes! And of course\\nmuch more as time progresses due to compounding.\"), mdx(\"br\", null), mdx(\"p\", null, mdx(\"a\", {\n    parentName: \"p\",\n    \"href\": \"https://www.irs.gov/pub/irs-pdf/f6781.pdf\"\n  }, \"IRS Form 6781\"), \" is used to report gains\\nfrom \\u2018Section 1256\\u2019 contracts. Filing your federal taxes for OptionAgent gains is\\nas simple as copying onto this form the amount we report to the investor on the Schedule\\nK1. The form instructs to calculate the 60% LT / 40% ST split, and then those two\\nnumbers go onto the investor\\u2019s Schedule D form and are added to LT & ST capital gains\\nfrom other sources.\"), mdx(\"br\", null), mdx(\"br\", null), mdx(\"p\", null, \"But wait, there\\u2019s more if you live in a high-tax state\\u2026\"), mdx(\"br\", null), mdx(\"br\", null), mdx(\"p\", null, \"When congress enacted the TCJA (Tax Cuts and Jobs Act) in 2017, the SALT (State and\\nLocal Tax) deduction became limited to $10K, known as the \\u2018SALT cap\\u2019. In states with\\nhigh state and property taxes, this is a severe setback for tax payers who itemize\\ndeductions as any amount above $10K from the aggregate of state and property taxes\\ncan no longer be deducted from federal income. If \\u201Cmarried filing separately\\u201D, each\\nspouse is even limited to only $5K!\"), mdx(\"br\", null), mdx(\"p\", null, \"However the SALT cap only applies to personal income, not entity income\\u2026 As a workaround\\nseveral high tax states (California, New York, New Jersey, and others) instituted\\nthe ability to tax income received from a pass-through entity, such as the Limited\\nPartnership of the OptionAgent fund, at the entity level. This then lowers the \\u2018distribution\\u2019\\non the Schedule K-1 for the investor and thus the federal reportable income, effectively\\nstill yielding a 100% federal tax deduction for the amount of state tax paid.\"), mdx(\"br\", null), mdx(\"p\", null, \"Here\\u2019s how it works in case of an investor who resides in California, subject to\\nCalifornia state tax. In the taxable year itself, by June 15, the fund needs to do\\na state filing in which it reports the limited partners (investors) who elect to\\nuse the PTET provision (as the default is that taxes are NOT paid at the entity level).\\nWe thus ask each of our investors who are subject to California state tax if they\\nwant to make use of this provision prior to June 15 (we would inform fund investors\\nin other states who may benefit from PTET as well but the specifics here apply to\\nCalifornia). If they do, then by June 15 of the taxable year the fund pays $1,000\\nor 50% of the prior year\\u2019s amount, whichever is higher, of the state taxes from the\\nfund source to California. The California PTE tax rate is a flat 9.3%. The remaining\\ntax due is then paid again by the fund by the tax filing deadline of that taxable\\nyear, i.e. by ~April 15 the year afterwards. Both transactions are recorded as withdrawals\\nfrom the investor\\u2019s capital account in the fund.\"), mdx(\"br\", null), mdx(\"p\", null, \"The investor can then claim the PTET paid by the entity for the taxable year as a\\ncredit (not a deduction, so a 100% dollar for dollar benefit) on that year\\u2019s tax\\nreturn, making it a zero operation for state tax. If the credit is higher than the\\nstate tax due, the remaining credit carries over to the next year. In California,\\nyou claim the PTET credit on state tax \", mdx(\"a\", {\n    parentName: \"p\",\n    \"href\": \"https://www.ftb.ca.gov/forms/2022/2022-3804-cr.pdf\"\n  }, \"Form 3804-CR\"), \".\"), mdx(\"br\", null), mdx(\"p\", null, \"Since the PTET resulted in withdrawals from your capital account, this will also\\nresult in a lower Schedule K-1 distribution for the years in which the amounts were\\npaid by the fund. And thus a lower reportable income for federal taxes, providing\\neffectively still a 100% deduction for state taxes paid on the investor\\u2019s federal\\nincome, bypassing any limitation from the $10K SALT cap.\"), mdx(\"br\", null), mdx(\"p\", null, \"The above procedure stays in effect at least until 2025 and presents a major opportunity\\nto lower taxation from gains obtained from a fund entity as OptionAgent vs similar\\ngains made in an individual brokerage account.\"), mdx(\"br\", null));\n}\n;\nMDXContent.isMDXComponent = true;","excerpt":"How to minimize taxes on your OptionAgent investment It’s all about IRA, Section 1256, wash sales, and PTET! I write this blogpost on April…","frontmatter":{"description":"It’s all about IRA, Section 1256, wash sales, and PTET!","title":"How to Minimize Taxes On Your Investment","date":"April 07, 2023","author":"Bart DeCanne","tags":["optionagent","fund","taxes"],"images":[{"childImageSharp":{"fixed":{"base64":"data:image/jpeg;base64,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","width":400,"height":281,"src":"/static/6e3b587d1cbab234e45e3d28c481facb/2244e/blog-1.jpg","srcSet":"/static/6e3b587d1cbab234e45e3d28c481facb/2244e/blog-1.jpg 1x,\n/static/6e3b587d1cbab234e45e3d28c481facb/4fe8c/blog-1.jpg 1.5x,\n/static/6e3b587d1cbab234e45e3d28c481facb/14b42/blog-1.jpg 2x"},"fluid":{"base64":"data:image/jpeg;base64,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","aspectRatio":1.42,"src":"/static/6e3b587d1cbab234e45e3d28c481facb/0d31e/blog-1.jpg","srcSet":"/static/6e3b587d1cbab234e45e3d28c481facb/ba5d5/blog-1.jpg 142w,\n/static/6e3b587d1cbab234e45e3d28c481facb/99d74/blog-1.jpg 285w,\n/static/6e3b587d1cbab234e45e3d28c481facb/0d31e/blog-1.jpg 569w,\n/static/6e3b587d1cbab234e45e3d28c481facb/2175c/blog-1.jpg 854w,\n/static/6e3b587d1cbab234e45e3d28c481facb/f30f1/blog-1.jpg 1138w,\n/static/6e3b587d1cbab234e45e3d28c481facb/03487/blog-1.jpg 2400w","sizes":"(max-width: 569px) 100vw, 569px"}}}]}}},"pageContext":{"slug":"/news/post2/","prev":{"node":{"fields":{"slug":"/news/post3/"},"frontmatter":{"tags":["optionagent","fund","AI"],"title":"AI Investing And Did It Find Alpha?"},"id":"47619180-8ad6-5e24-b44e-ed28f1c20fb7"}},"next":{"node":{"fields":{"slug":"/news/post1/"},"frontmatter":{"tags":["optionagent","fund","launch"],"title":"OptionAgent Launch & Initial Results"},"id":"533b745d-9b51-5b61-9633-25c22ec8ff98"}}}},"staticQueryHashes":["1095876681","2213392605","238224704","2932184110","3028016483","3699682132","748283036"]}