Comment by stochastician | Hacker News Reader

Comment by stochastician | Hacker News Reader

Matt Levine has an excellent explanation of why this isn't as big of a deal as it seems (read down to Heartbeats) [1]

> On the other hand I am not convinced that one should look at the transaction in isolation here. My view of the situation is not only that “an ETF is a mutual fund that doesn’t pay taxes,” but also that everyone accepts that. There just seems to be broad agreement among investors and regulators and policymakers that an ETF is supposed to be tax-efficient, that ETF investors get to defer capital gains until they sell their shares. (Again: This is a very widely advertised benefit of ETFs. 7 ) Some ETFs ran into a bit of a technical problem that might have required them to pay taxes, and so they developed a very technical solution that fixed it. The fact that the solution is a little shammy-looking would be a problem if everyone expected them to pay the taxes, but since people don’t expect that, any old solution will do.

[1] https://www.bloomberg.com/opinion/articles/2019-03-29/deals-...

With respect to Matt Levine, the exact opposite is true. ETFs were a tax dodge that became embedded in the system. To get technical, Congress enacted §311(b) exemptions in 1986, exempting gain recognition for in-kind distributions for Subchapter M companies as §852(b)(6). At the time, mutual funds rarely distributed property in kind. The first ETF appeared in 1993, and the spectacular tax advantage is a big reason for its success. Given their popularity, ETFs are also given regulatory exemptive relief from parts of the '33 and '40 Acts. I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free.

Credential - I'm a lawyer and value investor @ https://lembascapital.com/ and I spend a great deal of time looking at fund structures.

PS Other smart mutual funds began distributing in kind once they realized this tax structure was sufficiently embedded. See e.g. Sequoia Fund, the famous value investing mutual fund (at least pre Valeant) - https://www.wsj.com/articles/SB921028092685519084

I didn't read the Levine article as stating where ETFs games from, rather where they are today.

"I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free."

Isn't that what Levine is also arguing? Realpolitik as tax law.

It doesn't seem like you and Matt Levine are disagreeing about anything material. Just over whether it should be called a "dodge" or not. It's just a rule. It's almost exactly like the rule for real estate like-kind exchanges (at least in the effect it ends up having - you can swap the asset you're in without the frictional cap gains tax).

> With respect to Matt Levine, the exact opposite is true.

You may want to re-read what he wrote then, because you're literally just restating what he said. He even covered the history of the tax break, noting, as you did, that the law changed decades before the first ETF appeared in 1993.

Levine is explicitly saying that this whole thing came about by accident decades ago but today it has become "embedded in the system", and everyone, up to and including the regulators, believes that the point of an ETF is to be tax efficient, so they're going to let them be tax efficient, even if that requires some legal gymnastics.

> I'd argue this is like frequent flyer miles -- the IRS basically gave up on collecting them as taxable income because everyone thought of them as free.

Exactly. What exactly do you think you're disagreeing with Levine about?

From a UK perspective seems strange that any investment company would it self owe CT tax individual US shares don't.

And the USA does have REIT's as a model.

And large chunks of the capital invested in the USA in the 19th century was by UK investment trusts which don't pay capital gains - the owner of the shares does.

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