Bloomberg, T-Bills Without Tax Bills? This Fund Says It Cracked the Code:

A Marine Corps veteran with a finance Ph.D. has come up with a new way to avoid taxes.

Any American holding US government securities has to pay income taxes on the interest they generate. For the richest investors, the Internal Revenue Service’s cut is 37%.

But a year-old investment fund offers returns that closely track short-term Treasuries, with starkly lower tax bills. The fund, Alpha Architect 1-3 Month Box ETF, uses a complex options strategy and a longstanding tax loophole that favors exchange-traded funds.

“We spent seven years figuring out how to do this,” said Wesley Gray, the ex-Marine and chief executive officer of Alpha Architect. “My job is just to deliver all the value I possibly can to my shareholders, within the law.”

The fund, known by its ticker BOXX, surpassed $1 billion in assets this month. It is one of a number of efforts to use the ETF loophole in creative new ways, said Jeffrey Colon, a tax professor at Fordham University’s School of Law in New York. He called BOXX “the poster child for tax arbitrage.”

Innovations like BOXX might bring fresh attention from Congress, where Ron Wyden, the Oregon Democrat and chairman of the Senate Finance Committee, floated the idea of ending ETFs’ special tax treatment in 2021. Any legislation would face stiff resistance from the $8.4 trillion ETF industry and its millions of individual investors. …

So how does BOXX do it? Gray broke it down during a phone interview last month. A former Marine captain who served in Iraq before getting a doctorate from the University of Chicago, Gray, 43, spoke from his home in Puerto Rico, where he said he avails himself of the US territory’s generous tax benefits for investors. …

Colon, the Fordham professor, said lawyers, bankers and fund managers are all kicking around ideas for using ETFs’ in-kind redemption mechanism to solve new tax problems. One idea he’s heard: converting a hedge fund into an ETF to harvest winning bets and delay the tax bill. Another possibility is using ETFs in corporate takeovers to fend off selling shareholders’ taxes. …

Gray said billionaires have long had access to private, bespoke schemes to shelter wealth from the IRS. He sees ETFs as a way for regular investors to get some of the same benefits. “We’re one of a million products and ideas and innovations that, for lack of a better term, leverage the ETF tax technology to get a better outcome,” he said. “It’s more of a democratization of tax dodges.”