The ETF Tax Dodge Is Wall Street’s ‘Dirty Little Secret’
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The ETF Tax Dodge Is Wall Street’s ‘Dirty Little Secret’

Banks are pumping billions of dollars into and out of funds with “heartbeat” trades.


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One day, a trader injects billions of dollars into a technology fund. Just a few days later, that same trader suddenly withdraws all the money. What looks like the impulsive, erratic behavior of some off-the-rails investor is really a sophisticated tax dodge. Based on a 1969 tax law, this little-known maneuver, called a “heartbeat trade,” is legal in the United States, but some regard it as a scam. Eye-opening reporting from journalists Zachary R. Mider, Rachel Evans, Carolina Wilson and Christopher Cannon uncovers the way brokers, bankers and investors can legally game the system and avoid paying taxes.

Summary

“Heartbeat” trades are a way to avoid paying taxes on some investment profits. Ordinarily, if you own a stock that appreciates in value and you sell it at a profit, you are required to pay taxes on the profit. However, thanks to a law passed by the US Congress in 1969, mutual funds don’t have to pay taxes on gains if they use the appreciated stock to repay a fund’s investor.

In the early 1990s, with the advent of exchange-traded funds (ETFs), market participants realized that the 1969 law created a  loophole they could use to their advantage. The banks...

About the Authors

Zachary R. Mider, Rachel Evans, Carolina Wilson and Christopher Cannon are reporters for Bloomberg News.


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