whats the “constructive sale rule” mentioned in the note v2 exam 2 q9???
Can’t find it from the index of CFAI text. probably some outdated stuff? this is very characteristic of Schweser. - sticky
CFAI reading 19 Low Basis stock “Hedging typically comprises two distinct steps. First, the risk in the original low-basis holding is diversified within the constraints of the Taxpayer Relief Act of 1997, which defined and prohibited “constructive sales”. A taxpayer makes a constructive sale of an appreciated financial position if the taxpayer enters into: - A short sale of the same or substantially identical property. - An offsetting notional principal contract with respect to the same or substantially identical property; - A futures or forward contract to deliver the same or substantially identical property. Second, the investor borrows against the value of his/her portfolio, in a transaction often called “monetization”, in that the individual effectively monetizes an otherwise illiquid position. The proceeds from this borrowing are then appropriately reinvested.”
^yeah what he said 
also i think interst from borrowing is tax deductable
^You know what I hate… Interest from Borrowing is Tax Deductable, but Interest from Saving isn’t!!! They want people to save, yet they tax you on it! B@STARDS.
The stuff in Hiya’s post after “Second,…” is not part of constructive sale. You do not make a constructive sale if you borrow using appreciated securities as collateral (until you default and they take the collateral or something).
Yep, it is not, I should have clarified that. It is part of hedging, where constructive sales concept is mentioned (at least where I saw it) in the low basis stock chapter.
bigwilly Wrote: ------------------------------------------------------- > ^You know what I hate… Interest from Borrowing > is Tax Deductable, but Interest from Saving > isn’t!!! They want people to save, yet they tax > you on it! B@STARDS. They just introduced a Tax free savings account in canada …
you can also make a constructive sale if you put a tight collare on a position that accounts for more than 85% of your holding.
strikershank Wrote: ------------------------------------------------------- > you can also make a constructive sale if you put a > tight collare on a position that accounts for more > than 85% of your holding. what is the rationale that any collar doesn’t qualify as a constructive sale? if stock drops, i sell it to you - - if stock rises, you call it from me - - either way, i’ve effectively sold it - - just if it’s sufficiently “loose”, you can argue there isn’t enough certainty - - wonder how you define “tight” here
not sure exactly what ‘tight’ is - not a tax expert. I do know that if you establish a collar for greater than 85% of your position is is likely goign to be viewed as a constructive sale. that’s the detail i’d be looking for on the exam to determine if it has been constructively sold.
I think as far as forwards go, if at maturity it’s a physical settlement, as opposed to financial settlement, it’s considered a constructive sale… but I think this might be a little too granular for the CFAI…
I’m certain that people have tried everything with this one. Probably a ton of case law defining exactly what a constructive sale is for every wacky derivative hedging scheme anyone can think of. This is pretty Amerocentric for a global exam.
as far as collar goes, I think if you set your put strike below 15% of the current price (i.e., you are allowing to get a 15% hit on the downside), it won’t be a constructive sale; the premium you get from selling calls may also go into this equation (not sure how the math works there exactly) if the band is tighter than 15%, than most likely it will be a constructive sale