Offsetting dividends in a Roth and in a non-retirement account

Discussion in 'Taxes and Accounting' started by dcwriter2, Oct 2, 2021.

  1. Indulge me here. Let’s say I am long 1000 PM in my Roth IRA and then short 1000 in a different account, fully taxable, with a different broker. Hold both. My Roth dividends are not going to be taxed. But I can still deduct the dividends I pay in my short account, giving me a net gain, a slight one, but a riskless one. Correct? What would the IRS say?
  2. Girija


    You like to max out deductions, don't you. For the kind of deductions you are talking about you should get tax prepared by the league of KPMG/ Ernst and young etc. Then they will take the liability of audit or 9 out of 10 times irs wouldn't want to mess with you.
    There is a 45 day test for deduction of dividend on short sale but that gets reset if you hold offsetting positions which includes even a call. So the answer is a resounding no.
  3. Girija


    Also not sure you know this or not but there is also a alternative minimum tax that a system in irs works out to flag potential violations. You can also be reqd to file amt under certain conditions.
  4. Trader200K


    It would also be a negative if in the long term the short, taxable asset grew more with the Roth instrument shrinking. Effectively, exchanging tax free assets for taxable. The vice versa though, managed cleverly, would be essentially be shuffling tax deferred money to tax free … without paying the conversion tax.

    Hmmm … so what would be the downside of picking an unrelated instrument to short in the taxable accnt that is ~85% or better correlated w the Roth long … say w/o divs?

    Keep all the tax free divs with only a modest increase in principle risk while getting the IRS issue negated. Not risk-less of course, but def better positioned before a harsh or even a black swan event. Picking the plays would be the challenge.
  5. R1234


    There has to be a rule that forbids this. Indirectly transferring money into a Roth IRA through hedging against a taxable account.
  6. ph1l


    The IRS might say "that's an illegal short against the box." So, it might be a risky thing to try.
  7. Trader200K


    I clearly don’t know the tax code and in the current enviro I wouldn’t even try it … because … well you know all that.
  8. Sig


    So first off, it's important to understand what happens to a stock the when it goes ex. It drops by the amount of the dividend, all other things being equal. So in general, your short account will see a gain by the amount of the dividend that exactly equals the loss from the dividend, again assuming the stock doesn't experience a stock specific gain or loss at the same time. Dividends are entirely neutral events. So the idea doesn't work from a sheer mechanics perspective.

    Additionally, the IRS does have guidance that disallows the ability to claim a loss in the taxable accounts when performing identical wash sales which are designed to move money from a taxable to a Roth account, I'd need to do some digging to find the exact citation.
    dcwriter2 likes this.
  9. Tks for that last note, although identical is still stumping me in this world of easy high correlation data and trades.
  10. Sig


    There is a ton of definitions, private letter rulings, and case law on the definition of identical when you look up the term "substantially identical" in conjunction with the term "wash sale". It's definition is pretty clear, its just not necessarily all in one place.
    #10     Oct 12, 2021
    Trader200K and dcwriter2 like this.