Wes Gray 🇺🇸

As America turns 250, I keep coming back to a simple idea: this country is built on the dream of a win-win. You build something useful, create value, and make the pie bigger; your creation makes someone better off, and they pay you for it. Your gains don't require someone else's loss because by construction, what you build has to be a win-win, or it's back to the drawing board. America’s success comes down to one thing: a win-win culture. But this culture is hard to maintain because it goes against human nature: 1+1 = 3 is wacky math, and coveting your neighbor’s property is instinctual. Nevertheless, despite our worst instincts to think the opposite, a win-win culture makes everyone better off because the pie does get bigger. Alpha Architect fully embraces America’s win-win culture. We started with research, a small team, and a willingness to grind — not expensive marketing, a fancy office, or an army of salespeople, because all that leads to high-priced products (not a win for clients!). Our goal was a win-win: differentiated investment products at affordable prices, paired with the education to help investors understand them and sharpen their thinking. The market owes us nothing. Investors owe us nothing. We have to earn trust every day. We need to deliver value so others can get more, and maybe, if they are feeling generous, they’ll pay us a share of the value created. And we like that arrangement: Win-win. As America turns 250, we know we owe it all to this country and the culture that has been fostered over this time. America offers the freedom to build something useful, serve others, and keep proving that win-win is still possible. Semper Fidelis! Wes & the Alpha Architect team

@TKopelman @denitsa_tsekova Good news is they didn't say that. The press did. Here is a more precise recap from a law firm: klgates.com/thought-leader…

@alphaarchitect @denitsa_tsekova How do we feel about irs saying they are going to crackdown on 351s? Just saw this wealthmanagement.com/regulation-com…

A bespoke fund is becoming a must-have tool for wealthy investors looking to defer — and sometimes even avoid — capital gains tax. Our latest Big Take examines the rise of 351 conversions and the US Treasury scrutiny they’re attracting. Bloomberg identified 105 such ETFs, launched with a combined $22.1 billion in assets.

A great summary of the issues discussed at the recent WSTA conference from @KLGates klgates.com/thought-leader… "... they [irs] acknowledged the continuing importance of: (a) section 852(b)(6) to the operation of ETFs in the ordinary course; (b) the viability of section 351 contributions to ETFs in which the contributed assets fit the investment profile of the ETF and dispositions of assets are made in the ordinary course of business; and (c) an absence of concern about many traditional tax-planning strategies."

@jackstraw1972 @MebFaber That's awesome!

@MebFaber I led the execution of a 351 transaction into a new open end mutual fund 20 years ago. We converted ~60 SMAs into a fund with the exact same PM/strategy. In addition to the tax deferral, shareholders also received a 20bp fee reduction.

Both the WSJ and Bloomberg covered 351s this week. #6 coming this fall. Get up to speed here: cambriafunds.com/351

@goldstein_aa Well, another way to look at it is that you were blessed to have a huge LT capital gain in the first place. Definitely not the end of the world

Haha.. yes I've met someone with low basis in a security - me! I hate it, but yes sometimes I sell to diversify and I pay the long-term capital gains tax. I hate doing it, but now I feel worse because it seems I'm the only one... everyone else finds some way to avoid it, I guess :(.

Lots of chatter on tax deferral strategies for public assets.( not even discussing private asset markets btw). Assume we eliminate all of them. What happens? People will just liquidate and pay tax? Have you ever met someone with low basis in a security? They'll simply do nothing: hold concentrated portfolios and eat idiosyncratic risk, be stuck in expensive products, and likely enjoy a worse investor experience that will raise cost of capital in the market. Yuck

@grok Seems like a way better deal than exchange funds or using 351, which have lots of rules and regs!

**Section 1043** lets eligible federal exec-branch officials & judges defer cap gains on assets sold under a conflict-of-interest Certificate of Divestiture (from OGE or Judicial Conference). Reinvest proceeds in 60 days into US Treasuries or OGE-approved diversified funds/index ETFs. Gain is **deferred** (basis reduced in new assets), not erased—tax due later on sale of the permitted property. Classic use case: Rex Tillerson got one for ~600k Exxon shares + other holdings on becoming SecState. Similar tool available to many finance-background appointees divesting concentrated positions for ethics compliance. It’s a narrow, targeted deferral for public service, not a blanket loophole.

It is an interesting psychology situation in many cases its probaly financially rational, but there are tons of situations where people would rather lose money vs pay taxes. Maybe it is some sort of endowment effect phenomenon or perhaps a personal revolution against funding govt waste/fraud.

It’s absolutely incredible to see people’s decision making process to go entirely from investment risk and risk/return considerations to “we need to do anything possible to not pay taxes.” For the people that say “just ride it until a step up in basis.” Sure, assuming it’s still a productive investment and assuming you won’t be dealing with estate tax.

@bbnrj5 Yep, many tools to manage these issues. 100%. Lots of great ideas and there are no "silver bullets"

@alphaarchitect Wes is brilliant. But investors have many choices with appreciated assets outside of 351 or exchange funds. Tax loss harvest, direct index, tax gain harvest, sell portion and pay modest 15% cap gain tax, donate, collar hedge, etc. Or just hold and get the step up in basis.

all great questions. no clue in the end. there are so many ideas on the efficient application of tax and then there are all the questions of 'great, you have my tax $, what are you doing with it? wasting it? or actually adding value'. I doubt we are answering any of these things. lol

@bdkoepke @orrdavid @alphaarchitect Interesting - do you think investors would prefer to have capital gains adjusted for inflation and to pay a higher tax rate, or is the current system better for them? Does the current U.S. system therefore indirectly reward investors who have high absolute returns?

@DaveNadig @EricBalchunas i saw we just get them a claude subscription, load every raw document,plf, case, etc into that sucker, and roll with it. bank the savings on overhead to pay down the debt

@alphaarchitect @EricBalchunas For sure. But these are regulators. They have budgets and staff specifically to pay attention to, you know, their remit? So actually say something, or do something. If I can read all the relevant code in a weekend, so can an actual regulator.

@hkuppy have you gotten the explosive sh#$s yet? I was down there not long ago and our entire group went down in flames!

Does anyone have a friend/relative at Bolivian immigration? Been waiting 3 hours at the Atacama crossing and it’s ungodly cold…🥶

@DaveNadig @EricBalchunas *empathize*

@DaveNadig @EricBalchunas True. But I also emphasize a bit: these things went $0→$gazillions overnight and they can't bless it from a stage. 'Some worry' is probably the only sentence they've got, which is your point -- why even show up and cause more confusion. ha

@MrNQDC I think socialism and eroding property rights (i.e., wealth tax) is the main effort. Attacking deferral won't even do much on the revenue side

@alphaarchitect Is tax deferral the newest political fodder for the next campaign? I’m old enough to remember when Congress was targeting the Backdoor Roth Thankfully difficult to change tax law in this country

@TaxAlphaInsider @EricBalchunas @Todd_Sohn Yeah, we dont traffic in swaps so not familiar with that...but not surprised!

@alphaarchitect @EricBalchunas @Todd_Sohn ah, I'm referring to a slightly nuanced case involving a swap's reference index, which in this instance does hit NAV.

There's a DRAM-inspired tsunami of AI/semi/memory/etc ETFs about to flood the market, which will send the number of tech-related ETFs well over 500. That said, tech/theme ETFs have taken in $100b YTD, that's a TON for niche category and explains the supply rush. via @Todd_Sohn

@orrdavid Yeah, makes sense

@alphaarchitect The key selling point to the government should be that tax *deferral* means their own stake in the investment income is compounding, too. For contrast, they should vehemently fight anything that let's people escape the tax altogether.

@MarkTMeredith I should add another important point: "also the only possible strategies available to non mega rich people".

@MarkTMeredith Strategies not under review, "products that pay maximum tax and often high fees"

"The strategies under scrutiny include so-called 351 conversions, box-spread exchange-traded funds, products that offset ordinary income, and funds that avoid dividend income by flipping between other ETFs." finance.yahoo.com/markets/option…

@EconomPic @EricBalchunas Hellz ya. But also good for the economy! See im seeing win wins all around here.