Monetization of a concentrated position
The text says that monetization involves “receiving cash without triggering a tax event”.
However, when you look at the tools involved in the monetization process, especially when you hedge your position and then borrow against the collateral of the hedged position, every one of them will, in the end, trigger a tax event.
1. Short sale against the box: If the short sale goes against you, you’d have to sell your own shares to make up the loss on the short sale. That would trigger a tax event AND affect your concentrated position (that you did not actually want to dispose of)
2. Equity forward sale contract: This will, at the end of the contract, involve a sale, and therefore, both a tax event and will affect your concentrated position (that you did not actually want to dispose of).
3. Forward conversion with options: buying puts and selling calls - now at expiry or execution, both will involve you disposing of the shares and triggering a tax event.
How does this add up? The point of monetization is to raise cash without triggering a tax event, but in these cases, it does trigger a tax event AND it affects your concentrated position as you may ultimately have to dispose of the stock.
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