Tax optimization using futures

Hi guys

New Member here! I’ve been thinking about index futures as a means to save on taxes.

From my understanding, if I have 80´000 CHF invested in SMI (ETF or Stocks) it might be beneficial to use the SMI future instead which will give me the same underlying exposure. The cost to roll the position is less than CHF 80 per year (4x (8 CHF commision + 10 CHF spread) = 72 CHF), which is less than 0.1% pa.

Since there are no dividends on futures (but a discount upon purchase) this strategy yields no taxable income but only taxfree capital gains. With a dividend yield of 3.3% (2’640 CHF pa), tax savings would be very significant (around CHF 400 if you assume a marginal tax rate of 15%).

Additionaly this strategy can free up capital (margin requirements are low) since it allows you to effectively “borrow” at interbank rates (which are currently negative in Switzerland). Of course if you’re risk averse/prudent, you can leave the freed up cash in your brokerage account to minimize the risk of geting a margin call or getting liquidated.

Obviously this thought could be extended to other markets (especially with high dividend yields/low interest rates).

I’m curious to hear if anyone guys thought about this or has some experience with it (futures)?
Also, are there any pitfalls in my argument?

Cheers
Mr.Money

First thing to consider is that investing in complex, leveraged instruments may and probably will get you classified as a professional trader by the tax authority, which means you will have to pay income tax on your gains.

Another thing is investing on leverage (with borrowed money). It’s a quick way to get liquidated and possibly get in debt (contrary to what your broker tells you, you may end up owing money in sharp market downturns). You may be able to protect yourself from such effects by trading actively, but this is another trigger to get you qualified as a professional investor.

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Hi glina

Thank you for your feedback. I am familiar with the concept of leverage and I’m confident I can handle that aspect. I’m not planing to do any active trading in the futures market.

Does anyone have any experience in terms of the “professional trader” qualification thing?

Also, any input in terms of experience with pricing and so in is very much appreciated.

Regards
Mr.Money

Hi Mr. Money,

The tax administration will not consider you if following criterias are fullfilled (cumulative conditions):

  1. The holding period of the securities is at least 6 months.
  2. The total transaction volume (equivalent to the sum of all purchase prices and sales proceeds) per calendar year is no more than five times the securities and credit balances at the beginning of the tax period.
  3. Achieving capital gains from securities transactions is not necessary to replace missing income to sustain your living. This is regularly the case when the realized capital gains are less than 50% of net income in the tax period.
  4. The investments are not leveraged.
  5. The purchase and sale of derivatives (in particular options) is limited to hedging own securities positions.

Investing is all about the risk/reward relationship. In the situation you describe, you would possibly save a few bucks, but the related risk is that the whole capital gains qualify as income from a tax perspective. Therefore, I would not recommend playing around :smiley:

I hope it helps!

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Hi Mr.RTF

Thanks for your post. I’ve seen those criteria before… This is where I’m dubious at the moment…

  1. obviously I’m only holding each future for 3 months (then i’d have to roll it).

  2. i have more (foreign) assets, so this shouldn’t be a problem i guess.

  3. i have a decent salary currently outweighing my investment gains.

  4. futures are always kind of leveraged…

  5. it’s not really a hedge, in this case it would be a means to get exposure.

… also, I’m currently living abroad if that makes any difference.

The Kreisschreiben Nr. 15 seems to be pertinent for you, regarding the taxation (professional trader is another issue). https://www.estv.admin.ch/dam/estv/de/dokumente/bundessteuer/kreisschreiben/2004/1-015-DVS-2007.pdf.download.pdf/1-015-DVS-2007-d.pdf&sa=U&ved=0ahUKEwj3vta4k9jbAhXGCpoKHTnsDWcQFggLMAA&usg=AOvVaw1pkgU9ojWpRvpKVxquFy2r

On a different point, I was wondering what your plans would be for a 30-60% stock market crash. What consequences do you expect from the mentionned
CHF 80 000 futures position?

Edit: What I also do not understand in your strategy: Price indices like the SMI are ex dividends. So don’t you pay a lot in fees for basically receiving a return without dividends?
Are there futures on the SPI? Still not convinced, though.

Edit2: Futures are monthly/regularly rolled (and of course competitively priced). Expect the market to price-in at least partially expected capital gains. I would be surprised should you get nearly (before costs) a yearly stock index return. This makes the experiment - already before the market risks incurred - not worth it.

Edit3: Some more points:
a) Stocks do have huge volatility - how do you prepare for maintenance (or T-reg) margin calls? Stop loss do not always help. Idle money impairs returns.

b) At each renewal, you have to have money to settle (lying around idly) and the knowledge to price the futures correctly. Why not simy pick stocks (or even better: a diversified investment in broad market passive ETF) and reduce the risks?

c) With a discount upon purchase, I guess you will hold a short position? Are the potential tax gains really worth the added risk? Not the first one expressing this sentiment in the thread…

Yes of course, then you owe taxes to whereever you live now and swiss taxation is utterly irrelevant for you

@ hedgehog: Swiss taxation is not irrelevant for me since the dividends from swiss companies are getting taxes at source (35%) and i can later claim back 20% so I’m still stuck paying 15%.

The stuff about professional trading and capital gains we’ve been discussing is irrelevant for you. Your country’s rules will apply, not swiss.

Sell before ex dividend, buy back right after, no loss (dividend was priced in before ex divend) and no dividend tax to pay, no? Unless your country’s taxman thinks differently. Again - your country’s rules matter, not swiss. So, wrong forum, buddy, I’m afraid.

@ cray: thank you for your feedback.

I’ll be happy to address your points:

  1. if the stock market crashes 30 - 60% I’d expect to loose 30-60% of the 80’000, just like i would have if I held the underlying equities.

  2. the future that spanns dividend season will trade at a hefty discount to the index before dividends are paid out. Dividends are basically converted into Capital gains (which per the helpful document you provided will be tax free)

  3. i need to investigate if and to what degree any taxes are “priced into the futures”.

  4. the safest/simplest way to maintain margin would be to hold cash covering the entire position (80’000) in my brokerage account. However ideally I would probably hold somewhat less cash there as the interest rates they pay are miserable. I can deposit on same day, so I imagine 20’000 CHF at the broker would be fairly safe while I have the remaining 60’000 in a higher yielding savings account, ready to be shipped over.

  5. the futures settle cash continuously. Whatever cash is not “needed for safety” in my brokerage account can go into my savings account.
    This is economically the same investment as an SMI ETF. Ideally I would pay less taxes though.

  6. there’s no short positions involved in this.

Thanks for your feedback

Well the constant selling and buying comes at a cost too… According to my calculations, the futures route would be the most efficient one in my case. I´m also conidering swiss tax rules since I´ll go back to Switzerland soon and I don´t want to go back and forth between different strategies all the time.

Cheers

Once a quarter whenever your ETF decides to distribute I suppose, same as with your original futures example - you’re saying you’re going to do 4 trades/year to roll them over

Also why SMI? Switzerland is only about 2-3% of the world economy. Unless you manage 3-4M you’re overinvested in this crap.

Index futures are derivatives so you risk getting taxed as a professional trader if you do this here, I’d not recommend this strategy

Well, let’s leave my asset allocation out of this. As I wrote in my opening post, I’m looking at other markets where this might make sense too. I’ll probably have to talk to a tax expert before doing this in Switzerland to figure out the risk of getting taxed as a professional trader.

Thank you guys for your advice and warnings!

Happy Sunday
Mr.Money

Don’t waste your time, they won’t know. It’s at the discretion of tax administration on case by case basis and there’s little court practice on this so far, these rules are faily recent, from 2012.

It’s just one of the risks you’ll have to consider. Upside: a little bit of tax savings. Downsides: all your (realized) capital gains for the year become taxable + you’d owe 10.25% social security on them. Is it worth it, you decide.

I see. I guess I shall try my luck.

That doesn´t sound like a very appealing risk-reward profile indeed!

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Ohhhh watch out not to get involved in Dividend stripping, it might be prosecuted in your country as a practice of tax avoidance

Name a country before using such scary words. I don’t think this is illegal anywhere in civilized world. Tax treatment might vary indeed from country to country, you might not save anything or even hurt yourself.

This describes the exact opposite activity of what I described

Germany:


although this is “only” on a corporate level (“big fish”) it shows that this “grey” zone becomes darker…

indeed, i followerd the description on german wikipedia which defines it inversely to that of the english wikipedia. i admit i am no expert here.

After a 50% crash, somebody holding 80k in an SMI-ETF and 80k in Cash will have:

  • 80k in Cash, 40k in his ETF,

After a 50% crash, somebody holding 80k in unleveraged SMI-futures and 80k in Cash will have:

  • 40k in Cash and paying for futures contracts

How is this the same?

Moreover, to save a bit of taxes, you forego 80k in equity returns (the cash you have to hold)

If you did not hold the cash or used leverage, you are toast (margin call).

The problem in Germany was, that the same tax reimbursement for the same position was requested more than once.

If done regularly, Swiss tax authorities regard this as tax evasion. No criminal problems, they just assume, for taxation purposes, that you received the dividends. As the dates of securities tradings have to be declared, this is not hard to find out.

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