Basis Northwest in Review

All things taxable wealth.

Last week, I flew to Seattle for Basis Northwest. For the advisors that follow this newsletter, you should definitely check it out. Brent Sullivan did an incredible job and gathered some of the best minds in taxable wealth to present to 350 people.

(If you’re at all interested in taxable wealth, you’re doing yourself a disservice by not following Tax Alpha Insider).

Having spent time at Basis Northwest, I was even more impressed with the Tax Planning Certified Professional® designation that I recently completed. While I wouldn’t deem myself an expert in all the fields we talked about, I will say that most terms and strategies were not foreign.

So, having some time to reflect on the topics discussed, I wanted to write about 3 of the coolest things I got to hear about.

351 ETF Exchanges

The 351 ETF exchange is a really interesting offering to defer taxes. A Section 351 ETF exchange may allow an investor to contribute appreciated securities to a newly created ETF in a tax-deferred exchange.

There are some rules around what can be contributed. The top holding for any investor is capped at 25% of their contribution. The top 5 holdings are capped at 50%.

But the tax angle is that the gains associated with these positions are deferred. While I view the 351 ETF as more of a consolidation tactic than a pure diversification tool, it does have the potential to offer diversification depending on the strategy of the ETF.

My mind immediately started thinking about how a 351 ETF exchange could be an amazing off-ramp for direct indexing strategies. Here’s a refresh on direct indexing if you need it!

When we think of long-only direct indexing and how markets generally appreciate, the portfolios can become ossified. This just means that there may be no more losses to harvest. Rather than holding hundreds of positions, the 351 ETF exchange may pose an opportunity for an investor to consolidate their holdings while deferring taxes!

Box Spreads

The box is back. I got to see the SyntheticFi squad while I was there. If you need to review box spreads, make sure to check out my old post that had the CIO of SynthetiFi walk us through the strategy.

I won’t even lie. Every time I think of box spreads, my mind is blown. They just seem like such an efficient way to borrow relative to SBLOCs.

Now, what is interesting about the box spreads is that they are pretty tax efficient. When structured with broad-based index options, box spreads are generally treated as Section 1256 contracts. This means that the “interest” which I like to think more of as a capital loss, is deductible against capital gains. The treatment for the “interest” on the box is typically 60% long-term capital loss and 40% short-term capital loss.

As most of you know from my posts about direct indexing, losses have economic value. And when we’re borrowing, those losses can reduce the effective borrowing rate.

Pre-tax Alpha

I believe I’ve mentioned that some hedge funds are now going tax-aware. Two weeks ago, I walked through a very high-level overview of the tax-aware leveraged long/short strategies. If you need to check that out, here it is.

Nonetheless, one of the GOATs, Joseph Liberman of AQR, was there to present on how pre-tax alpha in these strategies can lead to less ossification, more position creation, and an overall better outcome for the investor.

Now, I won’t get too into the weeds here, because honestly I am not qualified. But if anyone is interested, here is a link to Joseph’s research, which is awesome.

My biggest takeaway from Basis was that taxable wealth is becoming increasingly specialized. With massive IPOs slated for this year, many advisors are looking at any and all angles to assist with the tax bite of concentrated stock positions. Tax-aware implementation seems to be catching serious fire.

All in all, Basis Northwest was a huge hit! I had a great time and got to meet some incredibly bright people. Truly, there were some of the brightest people in tax at the event. I had a blast and hope that you all enjoyed this piece.

If you have any questions about some of the other topics or want to chat about the conference in general, you know where to find me!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.