Here's is how I implement Probabilistic Tunneling posted in 2023:
Suppose I had $100 invested in UPRO before Trump's tariff announcement. Anticipating that the event would trigger market turmoil, I wanted to close the leveraged position and hold cash (SHV) until the volatility subsided.
In a tax-free world, this would be straightforward: sell the position and wait out the storm with no further risk. However, let’s assume the UPRO is held in a taxable account, and closing the position would trigger a capital gain of $90. If it's long-term gain, I’d owe 20% in federal tax,13.3% in state tax (CA), and potentially plus 3.8% NIIT. If short-term gain, the marginal federal tax rate can be as high as 37%.
Regardless of whether my bet is right, I would surely pay a significant tax bill. Instead of closing the position in the taxable account, I can open an opposite position in Roth IRA accounts - In practice, I used YANG and TMF to bet the market crash.
If the market does drop as expected, I’ve effectively transferred the loss in the taxable account to the tax-free account. If the market rises instead, the money flows in the opposite direction, but my overall portfolio remains market neural. As long as my betting odds are better than 50/50, this strategy can gradually move money in some desirable direction over time.
If the assets in the taxable account aren't highly appreciated, the strategy becomes even more favorable. Whenever the taxable account incurs a significant loss, I can simply close the position, realize the loss, and use it to reduce my overall tax burden.
