IRS打击利用ETF 351条款避税

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Hello [music] and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I hit the Money Stuff column for Bloomberg Opinion.

I'm Mary Childs, host of the podcast Mary in America

and Mary is guest hosting with me again this week.

Thanks [music] for having me.

Thanks for being here. So, I got a text the other night from Katie Griffeld.

A celebrity intervention here.

Yeah. My regular co-host Katie, who is out on parental leave with her newbornish daughter, Julia, who's been named on this show, which is why I don't feel bad saying it.

I think you should still feel bad.

I do feel bad, but she's named her on this show, so I don't feel that bad. [laughter] But anyway, she texted me a Bloomberg story. tax slashing holy grail popularized by AQR deal delta IRS warning and she texted Julia and I are discussing this on the baby stuff podcast this week which

oh

I believe that I have previously joked at least with my family if not necessarily in the newsletter about starting a new newsletter called baby stuff about my babies

they're not babies anymore Matt

but Katie's baby is a baby's baby is sitting at home right now playing pretend podcast with her about 351 exchange.

So, she can play this and it'll be like Clubhouse. It'll be a conversation. She can text us her thoughts. Hi, Katie.

Yeah, it'll be like, you know, like like you're supposed to talk continually to your baby so that they like learn language even if you're just sort of like narrating your day or whatever.

Totally.

Katie's video will just be learning about ETFs from birth. So, there's news this week about ETFs, which is that the IRS is cracking down on these like 351 exchange ETFs. And my theory of these ETFs is that ordinarily, if you're a person and you like own some stock and you want to own some different stock, you sell the stock that you own, you buy the different stock, and you have a taxable transaction, right? Selling stock for cash is a taxable transaction, even if like your ultimate goal is just to exchange it into new stock.

And for ETFs, that's not true. For ETFs, there's like a magical sort of pathway through the tax code that allows an ETF to exchange the stock it doesn't want for stock that it does want without incurring taxes.

It's like the whole beauty of ETFs. Right.

Right. At first that was like, oh, a neat little feature of index ETFs. And then people realized you could do that for actively traded ETFs where they were just deferring taxes on all of their trading. But then eventually the financial advisers realized like why can't everyone do that? And so they started being like going to rich individuals and saying, "Look, if you have a stock portfolio, you can wrap it up in an ETF and then you can from then on do whatever trading you want without ever incurring taxes."

And like the way it works is that there's two trades. There's like, you know, you're a person, you have a stock portfolio, you contribute it to an ETF and you get back shares of the ETF. That shouldn't be a taxable transaction, right? You're just like contributing shares to an ETF and getting back shares in exchange. And then the ETF itself can move the underlying stock in and out of the ETF by doing like heartbeat trades with authorized participants that are also inkind exchanges that never incur taxes.

And so the upshot of this is that if you are like let's say a sententillionaire, you can trade your stock portfolio without ever um incurring taxes. And the threshold is going down so that if you extrapolate this out in five years, everyone will be able to trade stocks without incurring taxes. And the financial industry was kind of extrapolating that out and I was like writing about it like, "Hey, that'll be fun when no one pays taxes to trade stocks."

And eventually the IRS had to crack down and they cracked down this week with a revenue ruling saying basically if you do this too obviously then [laughter] it doesn't work and you ask

if we notice we don't like it.

Yeah. It's like it's basically what it says is that if you contribute appreciated stock to an ETF and as part of the same plan, you immediately heartbeat the stock out and get back, you know, a diversified portfolio, then we're going to reccharacterize that based on the substance as you sold the stock and you have to pay taxes. But I don't think anyone quite knows what that means in terms of like how long do you have to wait?

And so, you know, we're sort of in early days of cracking down on this. It's nice. We're inventing the rules. We're inventing the lines. It reminded me of a 1031 real estate transaction.

Oh, it's totally a 1031. Yeah.

It's just so cute.

Yeah. I mean, the cynical view is that the 1031 exchange is really good for real estate developers and real estate developers are an important constituency in that for instance, the president of the United States is a real estate developer. But even before that, like you know, there were a lot of lot of real estate developers. Whereas like everyone can avoid paying taxes on stock trades is like a you know bigger arguably bigger loophole.

I don't know if it actually is a bigger loophole in terms of dollars,

right? Is it? Yeah, probably. But uh it's empirical. That's an empirical question. We could go find out,

right? Like I incur a certain amount of capital gains taxes by rebalancing my portfolio.

You do?

Yeah. And it would be nice not to, but

yeah, you shouldn't. I don't think you have to do that. I think that's as big a ticket as like you know if I were doing 1031 exchange but yeah like the point is that like the sort of broad theory of tax is that if you have an asset and you sell it for cash then that's a taxable transaction and you have to pay taxes on the appreciation and if you have an asset and you swap it for like kind of the same thing

you're still in the game. You haven't finished playing yet.

Yeah. And exactly where you set the parameters of that is kind of an open question. So 1031 exchanges I think a lot of people would say are kind of an aggressive setting of the batteries but it's it's in the tax code. Basically 1031 exchange says if you own like you know a commercial property and you sell it for cash

and then within a certain amount of time you reapply the cash to buying another commercial property then like you don't have to pay taxable gains on the uh on the sale because it's a essentially a like for like exchange. Oh, I mean the other thing is like when you take corporate tax in law school like one thing you learn is that contributing property to a corporation is a non-t taxable transaction. So if you're like a person and you own like a you know lemonade stand or whatever and you're like I don't want to own this business in m