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Tax Traps for IRA Investors in Short ETFs

By Holmes Osborne

 About this article:
 With the market down about 9% year-to-date, everyone is looking at making money shorting the market. It's not easy: the downside potential is unlimited. Stocks sold short can be called away by the brokerage firm while a position is at a loss, thus, realizing the loss. In particular, people are piling into short ETFs. However, qualified-account holders such as IRA investors who are buying short ETFs can run into the headache of unrelated business taxable income (UBTI). Shorting stocks can only be done in taxable accounts and not qualified accounts like IRAs. However, IRA investors can buy ETFs like the ProShares UltraShort Financials , the Rydex Inverse Russell 2x Leverage or the Federated Prudent Bear Fund A . However, activities inside of these funds can cause the shareholder to file taxes even if they are bought inside an IRA. This occurs when a tax-exempt entity participates in...

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