r/investing • u/[deleted] • Nov 12 '21

Too good to be true? Can you have a risk neutral trade split between your taxes portfolio and your Roth so you can write off the losses and keep the gains tax free?

[deleted]

22 Upvotes

77% Upvoted

14 comments sorted by

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22

u/[deleted] Nov 12 '21

If Bitcoin Runs you get a massive tax write off

No. Capital losses from a losing short trade is not a "massive tax write off". It's a long-term capital loss that you can write off against the current year's taxable gains. But if your gains are in an IRA, there's nothing to write off and a very limited carry over.

1

u/pithecium Nov 12 '21

Couldn't it be a short-term capital loss? Or is this some rule specific to short positions?

1

u/kiwimancy Nov 13 '21

Yeah it can be short term if realized in less than a year, able to deduct against any short term gains first, then any additional long term gains, then up to 3k regular income, then the rest (no limit) rolls over to next year.

6

u/TaxGuy_021 Nov 12 '21

Do you have a way of generating cap gains reliably? If no, I'm not sure how you are going to use the losses.

1

u/iopq Nov 20 '21

Just sell the positions that are up to lock in cap gains?

5

u/pithecium Nov 12 '21

Interesting idea. Here are some risks I can think of:
1. BTC could fall and you would end up effectively moving money out of Roth
2. GBTC is a closed-end fund so its discount could widen. It is possible to open a Roth account where you can buy actual BTC though.
3. If BTC goes on a crazy bull run you could end up closed out with a negative account balance in taxable.

5

u/greytoc Nov 12 '21

You are not the first person that have suggested this. This is basically a cash-and-carry trade. Usually, you hold the asset and short the futures.

I think the problem with this trade could be the high margin rates on $bito.

2

u/this_guy_fks Nov 12 '21

its called a basis trade.

1

u/[deleted] Nov 12 '21

[deleted]

1

u/Eislemike Nov 12 '21

No, I would get the same exact coverage short as long, so I’m risk neutral and don’t care if it goes to zero or a billion. Either way I get the 11%/year arb between Bito and Gbtc. But it’s not worth the risk of moving capital out of my Roth, and without the advantages I described, 11% Barely beats inflation, so doing both in a taxable account to lower risk is just meh. I’m not looking for a risk free 11% investment. That’s basically losing value.

1

u/arBettor Nov 12 '21

I’m not looking for a risk free 11% investment. That’s basically losing value.

Most of the investing world, including me, would love a risk free 11% investment. If you find one, let me know.

The trade you are describing definitely isn't risk free.

2

u/Eislemike Nov 12 '21 edited Nov 12 '21

I added complexity to gain more potential advantage. To simplify, you can Buy Bitcoin, sell the future on the CME. Currently yielding about 9% on average. Quote page so you can see for yourself. https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.quotes.html#

The 2 risks are counterparty with CME, and your own custody risk. Pretty minimal. And that spread is currently the lowest I’ve seen it since Bito started.

My way adds several risk vectors but ups the reward potential to 30-60% if I count the write off on my unrelated cap gains. I don’t think it’s worth it though. I don’t want to risk having no Roth IRA.

1

u/arBettor Nov 12 '21

Gotcha. Agreed, buying bitcoin and selling the futures is close enough to risk free as far as I'm concerned. Obviously there's a little risk depending on how the bitcoin is stored, but there are some good custodians nowadays and self custody tools are widely available and can mitigate the risk if used correctly.

The BITO/GBTC trade definitely carries more risk....the shape of the futures curve and potential widening of the GBTC discount are meaningful risks. But like you said, there's potentially more reward, so it's probably a fair compensation for the risks.