> For the complete documentation index, see [llms.txt](https://advisorhub.syntheticfi.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://advisorhub.syntheticfi.com/product-deep-dive/more-on-tax-deductibility-examples-and-filing.md).

# More on tax deductibility: examples and filing

{% hint style="info" %}

## The financing cost is treated as a capital loss under Section 1256

SyntheticFi loans are built from S\&P 500 index options. When a client borrows, they lock in a rate. When the box expires, it generates a capital loss, treated as such regardless of what the loan is used for. This is defined by statute, not interpretation.
{% endhint %}

### How it works in practice

There is no accounting or bookkeeping required from you or your client.

* The custodian issues a **consolidated 1099**.
* The custodian calculates **Section 1256 gains and losses**, which include the accrued losses from the box.
* The client's tax preparer reports it on **IRS Form 6781**, which is straightforward and supported by TurboTax.

**Reference materials:**

* [Schwab 1099 example](https://drive.google.com/file/d/1fRxx86eLKOJOH_H-zIudbqlYeJUWgZ5J/view?usp=drive_link)
* [Fidelity 1099 example](https://drive.google.com/file/d/1Zm2O5_LyLcZka_eAA21Mh-ZSO0CzXFOA/view?usp=drive_link)
* [IRS: About Form 6781](https://www.irs.gov/forms-pubs/about-form-6781)
* [TurboTax: What is Form 6781?](https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-form-6781-gains-and-losses-from-section-1256-contracts-and-straddles/L2rfcJXT9)

### What if the loan hasn't expired by year end?

SPX index options are Section 1256 contracts, which have two tax treatments:

* **The 60/40 split.** Capital gains and losses are treated as 60% long-term and 40% short-term.
* **Mark-to-market at year end.** If the position is held through year end, profit or loss is calculated based on fair market value at year end.

In the SyntheticFi box spread context, a client who holds the loan open through year end still gets the deduction for that year. The prorated accrued interest is reflected on their tax return, even though the position is still open.

### The Investment Interest Expense Deduction

{% hint style="info" %}

## This is an advanced tax position, not the standard treatment

Some tax practitioners claim the Investment Interest Expense Deduction, or other business-related deductions, for the financing costs on a SyntheticFi loan. This is a more aggressive position than the standard Section 1256 capital loss treatment described above.
{% endhint %}

To claim the Investment Interest Expense Deduction, the loan must be used for **investment or business purposes**. Whether a client qualifies is a determination for their CPA or tax professional, not for you or for SyntheticFi.

Practitioners taking this position have cited the **substance over form doctrine** and the **step transaction doctrine**.

SyntheticFi has requested a private letter ruling from the IRS to establish precedent on this question. We have not received a response. If you work with tax professionals evaluating this position, feel free to share [our request](https://drive.google.com/file/d/1EUXBfjmnRX0WMLOav58oVUx1U6boRyhL/view?usp=sharing) with them.

{% hint style="info" %}

## SyntheticFi does not provide tax advice

This page is informational only. Your client should confirm how any deduction applies to their specific situation with their own tax professional.
{% endhint %}

***

[\* Important Disclosures](/disclosures.md)


---

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