Long/Short pair trades is a legit strategy for tax loss harvesting?

[Andrew Stepner]

Richard, do you think this is legit?:

"David Orr @orrdavid: A simple tax strat: Short a broad ETF and get long a very similar one. At the start of every month, quit the losing side and replace it with yet another very similar etf. Let the winners run..."

https://twitter.com/orrdavid/status/1773122306505654449

Stepner

[Richard M]

I can see value here.

Another strategy is that if you have a long term capital gain, and you sell a covered call against it, and the stock rises:

As you roll the call up and out at a loss, you have a ST Loss.

But you have an untaxed rising LT gain in the long.

So if it's a slow-and-steady riser, you've actually created a LT Gain eventually taxed at 15%, a ST loss saving you 35%, and then less the premium.

Imagine you have 1000 shares at $100 each = $100,000

You sell at 1 month OTM call for $1, 10 lots = $1,000

Stock rises to $107:

Up $7,000 on LT gain

down $1,000 on calls.

You roll calls to the next month to a $110 strike for $2.

Stock rises to $112

Your $1 calls you bought back for $2 still a $1k loss.

Your $2 $110 calls you sold for $2 become flat = $0.

Net call performance = $1k loss

Stock LT gain = $12,000.

Tax would be $1,800 (15%)

$1k loss at 35% offsets $350 of other ST gains.

Put differently a $100 rise in a LT gain is worth $85 to you while a $100 loss in a ST loss is worth -$65 so there's a +$20 delta.  While if the stock never goes anywhere you move your breakeven down by $100 (but incur $35 in taxes on the call premium).

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Richard Mordini