question on concentrated single-asset positions

CFA Level III
#21

if you have paid the capital gains tax of $10,000 already, YOU NORMALLY WOULD HAVE USED THE OFFSETTING LOSS OF $10,000 provided by the hedge.

so NOT YET PAID = LOSS provided by the hedge NOT YET USED.

so can still use it now…

#22

and the reason you still havent paid the capital gains tax is cause you havent realized the gain yet. thats what it means by “SHELTERING the gain”

#23

am i right?

#24

you have it backwards.

you have the gain on the stock options. you have to pay taxes on that gain (due to the regulations). - by stating what you have in the last post - you have misunderstood the issue.

do you have any prior long term losses to offset it? If yes, should you use it now or should you use it later? (decision point).

  • say you have losses
  • if you look at the magnitude of the tax loss adjustment - it is going to be much smaller - due to the lower tax rate that you are allowed - since it is a long term loss. (While the capital gains on the stock options are considered a short term gain).
  • if you use the tax loss adjustment now - it is no longer available to use in the future. (you sheltered the gain due to the loss offset because You still retained some of the capital gains and did not pay the entire amount off as taxes).

are u with me up until here?

  • This next portion now relates to using the tax loss now vs. later.
  • you have an incentive to use the tax loss later if you expect that future taxes on gains are going to be higher than today.
  • If that were a scenario that is being predicted - you could defer using the tax loss adjustment now.
  • However - since that is a prediction and you have no control over it - if that prediction did not come to pass - would you have regret that you did not use the tax loss adjustment available to you earlier?

the nature of the hedge - that it is a derivative - causes it to be treated as a long term position and hence long term losses. this is a mismatch in character that is being talked about - and this is created purely because of the regulations (esp. in the US - and the CFAI clearly states that many of the issues in the reading are US centric).

#25

i get your logic, thank you very much.

i just dont get the wording in the notes…

what is NOT PAID

#26

is it this statement? again it refers to the 100,000$ of losses - which may be future period (beyond current period) that may not yet have been realized to be paid. Timing of gains vs. losses (gains are immediate, losses are potential and may happen in the future).