Dynamic Delta Hedging

**This doesn’t have to do with the exam, so if you don’t want to waste your time stop here.** I am just going through this strategy now and was wondering if anybody knows the tax treatment. In the old days, if you were long a stock that had a really low tax basis an alternative to selling the stock currently (and paying taxes) was to short the same stock (called shorting against the box). By doing so you eliminated the risk of the stock (perfect negative correlation) and you didn’t have to realize the taxes currently. In addition, the beneficiary of the stock from the deceased owners estate got a “step-up” in basis at the death of the owner. So if the owner had a stock worth $100 and a basis of $5 when he died the beneficiary inherited a basis of $100 (the $95 in appreciation was never taxed). Unfortunetly, the IRS changed the rules pertaining the shorting against the box, which they now consider “Constructive Receipt”. This basically means that even though you haven’t sold the stock, you have basically sold the stock (perfect hedge), so you have to pay income taxes when you establish the short position in the example above. Dynamic Delta Hedging seems to be an alternative to shorting against the box for immunizing risk of a concentrated position and delaying taxes. Does anybody know if the IRS deems this type of transaction constructive reciept? Thanks for reading all that…

im pretty sure it doesn’t - coz you still retain some risk in DDH as opposed to SATB, plus incur some significant transaction costs at that.