CU professor calls “BS” on Romney’s 13 percent tax rate claim

[TruthAnalyzed]

52. What difference is it supposed to make?

All I see are downsides. You don't get the profits from your stock, you essentially just transfer them to the matching hedge position, which probably isn't somewhere that you really want to be investing. You defer your taxes, but you also defer getting the potential profits you have earned, so you could still lose them... I don't see any possible upside to trying this.

Also, could you provide a link showing that this would be illegal? I wasn't aware of that, and I don't see why it would be. It just seems like a stupid strategy to transfer your profits to a position you may not actually like.

Let's say you start with $500.

You spend $100 on each stock initially, so you have(I'm know shorts are slightly different, but the dollar amounts are the same this way)

$200 cash
$100 in Short A
$100 in Long A
$100 in Long R

Everything goes to $1.50, and you close Long R and Short A. Long R gives you $150, and Short A gives you $50, so you have

$400 cash
$150 in Long A

The only difference between this situation, and not using the hedge on stock A, is that you haven't actually realized your gains, and now your asset is something that you wouldn't necessarily want it to be in. If you sold Long A, you would be in the exact same position you would have been without either trade in A(assuming no trading fees). What is the supposed benefit?

it's also true that my simple example doesn't re-establish a perfect tax hedge for a repeat of this strategy because the long 'a' position is indeed carrying a $50 gain. which isn't a problem next year if 'a' continues to rise (because you'll close out the short position again) but if stock 'a' goes back down the next year to $1, then the short 'a' has a gain and the long 'a' now has $0 profit; there's no loss (or, if stock 'a' dropped even more, there would be a loss but reduced by the $50 gain).

If A rises again, you would be holding $100 profit in Long A, and $50 loss in Short A. Your net position is still $50. If you close the short position, you have lost money on that trade, so of course you would get a deduction. But again, it doesn't matter, the only thing you are actually doing is transferring profits from your real positions to your artificial positions, which, by definition, aren't going to be as strong as your real positions. You're adding risk for no actual monetary benefit. You're not getting any extra cash out of the deal, and you aren't getting any extra assets out of the deal. You are only getting riskier assets.

You call it a strategy, but there is no upside to using it that you have been able to point out yet.

Notice in our example, you ended up with a floating $50 profit in Long A, and $400 in cash($550 total).

That is exactly where you would be if you didn't open the A positions, and didn't close the R position. So if you think Long A is such a good investment, you could close Long R and open that new position. If you don't think Long A is a good position, you are risking your profits from Long R by holding it.

So please, show me what the benefit is.