Unrelated to the exam and strictly for my own purposes. Is borrowing against a cashless collar considered a sale for tax purposes (in the US) or not?
Here, let me google that for you. It’s an interesting read. I assume the author provides it in good faith, but cannot guarantee accuracy. Like most things, it seems the answer is ‘it depends’. In this case, on how you structure it.
https://riabiz.com/a/2010/4/26/structuring-to-optimize-tax-efficiency
Saw that article but I was disappointed with the lack of clarity lol. Thanks though
that was actually pretty clear compared to a lot of tax stuff you will see in real life! Exam constructs typically oversimplify things.
You’re trying to borrow against the cashless collar position? Do you mean you have a cashless collar position and you’re borrowing against the underlying? Either way I don’t see how this would trigger a taxable event because you aren’t selling anything. You’re just taking out a loan and using collateral.
I’d suggest you read about constructive sales and wash sales to better understand the tax issue (and maybe theory behind it). But you’re right that it’s not the loan that’s creating the taxable event. It’s entering the cashless collar itself on an asset that you hold on an appreciated basis. (or that’s my understanding. As with all tax things, consult your tax professional :)) You likely have a taxable event regardless of the loan (I say likely because the original posting didn’t mention an appreciated asset, but why else would you enter one? (oh wait, there are reasons, never mind …)
Ok, good point on the “constructive sale” rule except even with that rule cashless collars are usually exempt because of the wider bands. His question is just about borrowing against the position. My point was just that taking out a loan would not trigger a taxable event.
Taking the loan out wouldn’t have tax consequences but as they’re mentioning using the hedged positions in like a risk based system where the larger the hedge on the position the the higher the LTV however hedging techniques themselves can be taxed like a sale and that’s where they’re talking about the tax consequences of hedging the collar.