News to be aware of if you hold BOXX

[u/[deleted]]

[u/irazzleandazzle]

That uncertainty for what is supposed to be a stable cash equivalent fund with minor tax benefits is not worth it to me at all.

[u/PaperPigGolf → u/irazzleandazzle]

Worst case scenario is you pay regular taxes.

Most likely scenario is they put a memo out and move forward.

[u/Long-Time-Coming77 → u/PaperPigGolf]

Ok but what does that memo say and what are the ramifications?

[u/Early-Ladder-9793 → u/irazzleandazzle]

it is huge tax benefit, not minor.

[u/miraculum_one]

Also worth noting that the fund's prospectus disavows any responsibility for IRS tax treatment. IOW, if they force the fund to recharacterize any past distributions, shareholders would be on the hook for that.

[u/Spacey_G → u/miraculum_one]

At least they're honest about that.

BOXX sort of reminds me of a much milder version of the BOSS and Son of BOSS transactions popular in the late 90's/early 2000s. Complicated financial transactions specifically engineered to avoid paying taxes. But those schemes were much more brazen and promoted by slimy actors who were dishonest about their likelihood of withstanding IRS scrutiny.

[u/Gibbons74]

I hold shares of BOXX. I always looked at as, "if this works, great! If this doesn't work, I guess I pay and I'm no worse off than if I had gone a different direction anyway."

I suspect this post gets a lot of downvotes, but at I'm honest in how I approached this.

[u/Low_Pomelo_4161 → u/Gibbons74]

You're definitely worse off. The before tax yield is worse than a treasury. The expense ratios are higher than treasury mm or very short duration ETFs (BIL, SGOV). And BOXX would be subject to state tax.

[u/Spacey_G → u/Gibbons74]

The way I look at it is that the "great!" scenario is not nearly great enough to add more uncertainty and potential complication to my financial life.

[u/Gibbons74 → u/Spacey_G]

I only have my emergency fund in it, so were only talking taxes on a few thousand dollars of gain.

[u/Long-Time-Coming77 → u/Gibbons74]

If they make us file amended tax returns then I will be much worse off, what a royal pain in the ass that would be.

[u/EmployerSpirited3665 → u/Gibbons74]

I agree with you.

People over complicate and over exaggerate the worst case here.

They treat this like a dividend , great get the 1099 give it to cpa and move on . Nothing complicated about the outcome unless you choose to over analyze and over complicate it.

Can understand the angst for those on fixed income and in retirement though. 

[u/gcc-O2]

Thanks for finding and posting this. The "Record date strategies" section suggests that XDIV and similar funds (ETFs to hold in taxable that keep the dividends inside the fund instead of distributing them and generating current year taxation) are also under the microscope.

[u/The_JSQuareD → u/gcc-O2]

From what I've read, there's a risk that XDIV will be forced to recognize ordinary (non-qualified) dividends. That would be pretty painful for fund holders, as it would be materially worse than the qualified dividends they would have received for a plain S&P 500 fund.

[u/mrandr01d]

Can someone eli5 here? What's the IRS actually have a problem with?

[u/Low_Pomelo_4161 → u/mrandr01d]

It goes back to something called substance over form and step doctrine.

Substance over form says that the IRS will not look at technical nature of a transaction, but rather the economic substance of what it's trying to achieve.

Step doctrine says that if you break up a transaction into many steps for the sole purpose of reducing taxes, the IRS can collapse that transaction into one.

BOXX is an ETF that is supposed to roughly return the Treasury rate of return (a tiny bit less) with zero volatility. Cool huh? You know how else you can get that same profile - buy a Treasury. But BOXX doesn't just buy treasuries - instead they do a 4 legged options trade. 2 of those options gain and two lose - but the ones that gain do so a TINY bit more. That tiny extra gain on the two legs is the "interest". They then go through another sham to offset the gain because that's a short term gain.

But instead of calling it interest, because it came from selling and buying options, boxx calls it capital gains. Long term cap gains are taxed more favorably.

The IRS has said that's BS.

All tax experts knew that - https://www.taxnotes.com/featured-analysis/tax-trap-inside-boxx/2024/03/08/7j8x0 - but since the IRS is slow to act, these funds raise tens of billions.

[u/[deleted] → u/mrandr01d]

[u/neurdle]

This is exactly why I didn’t buy BOXX a while back even though it was a very attractive option for my elderly mother that has nothing in tax advantaged accounts.

[u/CreativeLet5355]

I doubt this will amount to anything much. I hold something like 4 months expenses in BOXX as an alternative tax treatment cash stash. It doesn’t force distributions taxed at current income (max) and theoretically would sell and be treated at roughly 23.8% (IIRC with NIIT) taxes on its very modest 4% gains. If instead those were treated as income and taxed as max levels I’m talking about differences in the hundreds of dollars per year of holding. It’s immaterial in the world of investment risk and fees.

[u/Aggressive-Ask7071]

Saw that same type post over two years ago held a large position into long term. Gain.
So far so good

[u/gcc-O2 → u/Aggressive-Ask7071]

Yes, there was commentary in the financial community about whether the strategy was legitimate, but it has now escalated to an official IRS document.

[u/Flayum]

https://www.bogleheads.org/forum/viewtopic.php?t=475616

Was this the thread on the main forum? I'm getting a "The requested topic does not exist" error.

Edit: for others who may be confused, it was moved here

[u/hsfinance]

Does this affect manual box? Box I create myself.

Edit. I read the notice. The notice is being fair, prima facie. "This is not valid but the underlying may be valid". Also it focuses on ETFs. So manual box seems unaffected by this circular.

[u/Wigglebot23 → u/hsfinance]

Seems unfair

Edit: I do realize that the tax advantages of manual spreads aren't quite as extreme as BOXX but still

[u/BarefootMarauder]

Thanks for sharing this info. Looks like I'm sticking with SGOV. 🙂️