in that notice treasury seemed most interested in the taxation of swaps and in economic substance meaning a real non-tax purpose for the trades in the fund from what i can tell professor himmel is the first to suggest that treasury is barking up the wrong tree that some trader funds are profitable and implemented in accordance with the law it's the exception from the passive activity rules that treasury wrote that he's interested in that's why he calls the 1988 trader fund exception a treasury own goal can you just give us the broad strokes of the paper

The paper addresses the ordinary loss harvesting strategies that have been coming out of a few hedge funds, AQR most notably.

And the idea is to enter into a combination of notional principal contracts that will generate ordinary losses and capital gains.

So this could be equity swaps where each payment that you make pursuant to the equity swap leads to an ordinary deduction and then when you terminate the swap that is uh capital gain or loss so if at the end of the first year of the swap uh the position has gone in your favor so it's it's valuable now um take the capital gain will be a long term capital gain if it's moved against you keep on making those ordinary those periodic payments so that you generate ordinary loss deduction so at the end of the year the fund is passing through to its limited partners ordinary losses and capital gains When I learned about that, my first reaction as a tax professor was, why would that work? The limited partners are passive investors in this, and the passive activity loss limitations should apply.

We teach the passive activity loss limitations in intro income tax classes.

We don't teach the trader fund exception in intro income tax classes.

So normally this would do very little good for the limited partners because they'd have these ordinary losses that they can't use to offset their ordinary income because they can only use the passive activity losses to offset passive activity income.

It's a great question.

Could you just tell us about what's happening with a box spread or what a box spread is and then what's happening inside of the ETF wrapper as of just a handful of years ago?

A box spread has four legs.

It's a long call, a short call, a long put, and a short put.

And folks have been using box spreads for decades in order to generate a synthetic asset with debt-like features so that you are effectively getting the risk-free return over a the number of months that your box spread is in effect.

And the genius of the box ETF was to put the box spread inside an ETF wrapper and potentially allow investors to convert interest on something that looks like a treasury, which is normally taxed as ordinary income into capital gain and potentially long term capital gain.

The way that Alpha Architects initially constructed the box ETF, the box spread consisted of exchange traded options on the S&P 500 index, which are taxed under Section 1256.

60% of the gains are long term, 40% of the gains are short term.

There's no