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In some jurisdictions, derivatives are taxed differently to equities (as regards [[stamp duty reserve tax]] for example, and in the US, under [[871(m)]]) so it is important that your synthetic position doesn’t look like a play to avoid tax. [[Tax attorney|Tax attorneys]] — especially American ones — will fret mightily if it does. One of the key indicators here will be the degree to which the contract permits you to influence or control your [[prime broker]]’s hedge. A derivative counterparty should care not one whit about its broker’s hedge — other than its cost. If it does takes an unhealthy interest, the [[fear]] will be that the swap position is [[recharacterised|really no more than]] a disguised custody arrangement of shares that you have actually bought, and on which you should have paid tax, [[stamp duty]] and so on. Depending on which tax specialist you ask, this might extend even to your interest in the [[PB]]’s the hedge execution price. Thus, you will see much chatter about the termination price being the one a “[[hypothetical broker-dealer]]” might achieve selling [[fungible]] securities, and [[volume-weighted average price]]s and so on.
In some jurisdictions, derivatives are taxed differently — more favourably — than [[Cash equity|cash equities]] (for example [[stamp duty reserve tax]], and in the US, for certain types of underlier, under [[871(m)]]) so it is important that your synthetic position doesn’t look like a tax play. [[Tax attorney|Tax attorneys]] — especially American ones — fret mightily that high-delta [[equity derivatives]] do.
 
One of the key indicators, they intuit, is the degree to which the contract permits a swap counterparty influence or control its [[prime broker]]’s hedge. A swap counterparty should care not one whit about its broker’s hedge — other than its [[cost]]. If it does takes an unhealthy interest, the swap position may be — dramatic look gopher — [[recharacterised]] as a ''disguised [[custody]] arrangement'' of shares the swap counterparty has in reality bought, and on which it should pay tax, [[stamp duty]] and so on. Depending on which tax specialist you ask, an “unhealthy interest” might extend even to the execution price the[[broker-dealer]] achieves on its hedge. (This seems potty to us, by the way, but such is the interior world of the US tax attorney). The attorneys are greatkly calmed by the suggestion that a hedge execution price is imaginary, and not real, even though it happens to be identical to the real one. Thus, you will see much chatter about prices a “[[hypothetical broker-dealer]]” might achieve selling [[fungible]] securities, and [[volume-weighted average price]]s and so on.


So who, why, which or what is this '''[[hypothetical broker-dealer]]'''? Well, he’s a fellow just like the ''actual'' [[broker-dealer]] — in the same jurisdiction, having the same taxation status, earning the same income, executing the same hedge transactions, eating at the same restaurants, having the same GSOH and watching the same stuff on Netflix — but ''not'' the actual [[broker-dealer]]. He’s like actual [[broker-dealer]]’s “sober me”, only ''he gets drunk too''. Now this might strike you, as it strikes the [[JC]], as just too cute – too much of a playground argument to hold water. (“I didn’t break the window, sir, honest, sir, it was a boy who looked exactly like me who arrived from out of nowhere and is gone now”). But [[US tax attorney]]s seem to be taken in by it even, if they won’t buy arguments on actual economic substance.
So who, why, which or what is this '''[[hypothetical broker-dealer]]'''? Well, he’s a fellow just like the ''actual'' [[broker-dealer]] — in the same jurisdiction, having the same taxation status, earning the same income, executing the same hedge transactions, eating at the same restaurants, having the same GSOH and watching the same stuff on Netflix — but ''not'' the actual [[broker-dealer]]. He’s like actual [[broker-dealer]]’s “sober me”, only ''he gets drunk too''. Now this might strike you, as it strikes the [[JC]], as just too cute – too much of a playground argument to hold water. (“I didn’t break the window, sir, honest, sir, it was a boy who looked exactly like me who arrived from out of nowhere and is gone now”). But [[US tax attorney]]s seem to be taken in by it even, if they won’t buy arguments on actual economic substance.
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