A widespread tax deferral technique used by high-paid US executives and entrepreneurs to deal with capital gains taxes and diversify their h...

A widespread tax deferral technique used by high-paid US executives and entrepreneurs to deal with capital gains taxes and diversify their holdings out of company stock has been thrown into doubt by a recent opinion of the IRS, the US’ tax authority. The IRS opinion relates to the taxation of "prepaid variable forwards," which use derivatives to protect large executive stock positions from large falls in the market while minimizing tax hits. The IRS opinion suggests that the strategy may crystallise an immediate capital gain rather allowing the investor to defer taxes for a number of years. Although it is not clear how many high net worth clients might be affected, some US-based wealth managers expect that the opinion could affect billions of dollars of transactions and force a large number of clients to make retroactive tax and interest payments. Many US private clients and their advisors are now accessing whether their transactions might fall into the tax trap, and they are also considering alternative strategies to hedge or diversify portfolios.