Have you heard anything about the IRS trying to pressure short ETF positions (like DXD) out of the market?

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SagerXX's picture
SagerXX
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Have you heard anything about the IRS trying to pressure short ETF positions (like DXD) out of the market?

Hey gang --

I have a very small amount of money left in the market.  It's in an ETF that's short the Dow (DXD), and I'm in it as a hedge against another big down leg.  (Yes, yes, I've been getting killed since July, but it's a small amount of buckage and if the market tanks big [thereby driving my small biz down] at least I'll have a little consolation prize.)

NOW:  I got a call from the woman who runs the office at the brokerage that manages the account.  She left a fairly long message saying that the IRS considers DXD a 'speculative position' and they do not want me holding such -- that they 'do not consider it to be an appropriate position' for an account such as mine and they have given my brokerage a deadline of 12/31 for liquidation of the position and reinvestment in something 'more appropriate' -- and they may 'put restrictions' on the account if I don't take action by end-of-year.

Has anybody else (who's in a short ETF) heard anything about this?  It's so bizarre that I can hardly fathom what they're trying to get at.  I've sent a lengthy e-mail back (quoted below) but haven't yet received a reply.

Viva -- Sager

 

My e-mail:

'Hey [name of woman in question] --

I got your voicemail of last Thursday -- thanks for calling.  I appreciate your due diligence and concern vis-a-vis the DXD position I'm holding.  I don't understand exactly why the IRS is interested, but suffice it to say I understand that everybody out there is looking to prevent financial catastrophes these days.  

I'm pretty sanguine about my position in DXD.  It's a hedge against another big downturn as I have other investments that are currently on the upside and so I'm insuring against too much volatility.  Unless something's done to take care of the massive issues in CRE coming up in Spring/Summer '10 I reckon the market's going to be in for a pretty bumpy ride.  This is not to mention the current kerfuffle over in the EU with GreeceIreland and various other countries either on the ropes or headed for them.  If the EU sneezes, I think the whole world could catch a cold.  (Or H1N1...)

The Fed may be pumping up the market with their QE policy but I'm not convinced of their ability to keep China (and other buyers of US debt) happy forever, or their ability to walk the knife's edge between a deflationary downspiral and an inflationary meltdown.  So far so good, but Bernanke et alia can't be getting too much sleep these days.

If I need to sign a waiver or something to make the IRS or whoever happy, let me know.  I guess it has to happen tout suite if the deadline is 12/31.  And if you have other thoughts or concerns, I'm all ears.'

ao's picture
ao
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Re: Have you heard anything about the IRS trying to ...

Sager,

Is this a retirement account like an IRA?

Gungnir's picture
Gungnir
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Re: Have you heard anything about the IRS trying to ...

Could this have any bearing on the issue?

http://au.sys-con.com/node/1129452

SagerXX's picture
SagerXX
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Posts: 2219
Re: Have you heard anything about the IRS trying to ...

Ao, no, it's not an IRA.  And that's interesting, Gungnir.  Although a lot of lawsuits like this get filed.

ao's picture
ao
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Re: Have you heard anything about the IRS trying to ...
SagerXX wrote:

Ao, no, it's not an IRA.

That's really bizarre.  It might be interesting to contact the ETF sponsor and see what they have to say about the matter.  Also, has your broker had this experience with other clients with short positions?

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Dogs_In_A_Pile
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Re: Have you heard anything about the IRS trying to ...
SagerXX wrote:

NOW:  I got a call from the woman who runs the office at the brokerage that manages the account.  She left a fairly long message saying that the IRS considers DXD a 'speculative position' and they do not want me holding such -- that they 'do not consider it to be an appropriate position' for an account such as mine and they have given my brokerage a deadline of 12/31 for liquidation of the position and reinvestment in something 'more appropriate' -- and they may 'put restrictions' on the account if I don't take action by end-of-year.

Has anybody else (who's in a short ETF) heard anything about this?  It's so bizarre that I can hardly fathom what they're trying to get at.  I've sent a lengthy e-mail back (quoted below) but haven't yet received a reply.

Sager -

Just my $.02 but this smells. 

If it's just a small amount of flush money I'd call the bluff.

Politely thank your broker and let her know that you are not concerned with her opionion regarding what she or the IRS considers to be an "appropriate position".

I would ask about the "restrictions" that "might" be put on the account and then let them know in no uncertain terms that should said restrictions be implemented then you will take the account elsewhere.

It will be interesting to see how this plays out.

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pseanthebull
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Re: Have you heard anything about the IRS trying to ...

Have not heard anything about the "IRS", however, a couple of months ago FINRA (regulatory body for broker dealers) issued a ruling that the  instruments were considered speculative and should only be used for intra day or very very short term trading.  They should not be used for "The Average Investor" in a buy and hold strategy.  The response of the industry by and large was to tell their clients that holding these instruments would no longer be allowed in a typical brokerage account.  The industries stance was that FINRA already said no and if a claim was brought against a firm later for owning such a vehicle then FINRA would come down hard on them.  So multiple firms just threw in the towel and decided not to allow the products.  This person who called you sounds like they were either illinformed as to the total issue.  Best bet is E trade, they should not have any issues holding the ETF.

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
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Posts: 2219
Re: Have you heard anything about the IRS trying to ...

Roight! 

Heard back from the broker.  Evidently they set up a 'profile' of each account's holder when the account is opened and it contained very sparse information as it was opened at my Mom's behest (she occasionally dishes some shares to myself & my brother by way of dispersing some of her estate).  What was New America Growth Fund I shifted into Ultra-Short ProShares (DXD) earlier this year.  My profile had me down as a non-sophisticated investor and had no notations for my income/net worth/etc.  So evidently the IRS tries to guide brokers in *their* guidance of unsophisticated investors and I looked like a total noob. 

When they got my e-mail (including my VERY sophisticated use of such acronyms as 'CRE', 'QE' and 'What, you think Bernanke can walk the line between deflation and inflation?' Tongue out) I guess they decided to re-jigger my profile.  They're going to 'up some of my profile specifications' and see how the computer likes that in terms of not needing to get me out of DXD.  Of course, if their venerable and sage computer insists, I can always, as pseanthebull advised, move my (smidgeon of) money elsewhere. 

Thanks for your answers, ya'lls.  I'm still curious to see that IRS memo, though.  Could you imagine if they pushed X thousand of people off their DXD posish just prior to even a 10% market correction (meaning investors missed out on a 20% swing)?  That'd have class action lawsuit all over it, no?  Shouldn't our fine fine IRS employees be busy digging into bogus offshore tax havens?  Egad.

Thanks again -- ya'll ROCK.

Viva -- Sager

nb:  edited for syntax errors

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