What is the tax treatment of a synthetic loan created using multiple index options?
For example, using SPX (SP500) index options one can create a synthetic loan known as a box spread. Suppose SPX trades at 3500. The "short box" is a loan borrowing created by buying a call option at a higher exercise price (say 4000), selling a put option at this same exercise price (4000), and selling a call option at a lower exercise price (say 2000) and buying a put at this same lower exercise price (2000). This produces a credit as wide as the upper minus lower strikes multiplied by $100 per point. For a 4000 - 2000 wide we get $100 * 2000 = $200,000. The credit generated will be less than $200,000 and represents the discount in the zero coupon bond equivalent. For example, a $197,000 credit today with $200,000 payable at expiry. This translates into $3,000 in interest paid for this loan. The four options must be traded as one unit in order to provide a no risk payoff structure. SPX is of course european exercise with cash settlement at expiry so no early exercise risk.
The purpose of this instrument is to create a cash credit to purchase other securities on margin, but to pay a lower interest rate than the broker rate. This would not increase any buying power (provided by collateral), only generate a cash credit to avoid using margin/paying broker margin rates.
Would the tax treatment differ between option maturities, 90 days to expiry vs 1000 days (1 year+) which are both available timeframes?
As far as I can see this represents a single arrangement (looking briefly at TR 2012/4) since the no risk payoff structure is only possible when all four legs are combined. However, I am not sure if the ATO would consider the instrument as a zero coupon loan which would have interest accrued and the $3,000 from the example above should therefore be tax deductible somehow? If classed as a zero coupon loan, how is the interest accrued for potential tax deductability?
I don't think the credit could be treated as a capital gain at initiation as is the case with single leg options sold for a credit as the maturity and packaging of 4 legs requires repayment of the par value like a zero coupon bond at expiry. There is no change due to change in price of the underlying - you are guaranteed a "loss" at the very start which represents locking in the interest cost. The inverse of the loan borrowing, ie. a long box spread which would lend out the $200,000 would create a debit which obviously cannot be counted as a capital loss.
Then there is the FX treatment of this in USD as SPX is in USD. If treated as a USD denominated zero coupon bond there should be no FX involvement at all, however I doubt it is that simple...
Any thoughts appreciated!
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