G2 FinTech focuses on a technology niche of helping accountants automate the process of tax preparation for financial firms that need to deal with complex transactions such as wash sales and straddles on a regular basis.
CEO George Michaels told me recently about how the company’s TaxGopher software works. “In the world of hedge funds and mutual funds, there is a set of accounting rules that you follow to figure out what your profit and loss is,” he said. “Then there is a whole other set of rules to massage your profit and loss so you can report that to the IRS.”
The software deals with areas such as wash sales, constructive sales, tax straddles, and whether or not dividends are qualified or unqualified. G2 FinTech’s software helps automate the process of figuring the tax treatment so accountants don’t need to rely on their own spreadsheets.
“We all know an accountant’s favorite tool on the planet is a spreadsheet,” said Michaels. “But when you’re staring at a trade blotter of 5 million different trades and you’re trying to figure out whether or not you have any wash sales or not, the task can be a little bit daunting. When you try to use a spreadsheet, and the spreadsheet says, ‘Sorry, I can’t handle that many rows,’ that makes it problematic. So in the world of hedge funds, particularly where you have what are called high-frequency hedge funds, where you’re trading a lot, the problem of figuring out all the different rules in order to pay your taxes correctly is a bit overwhelming.”
With a wash sale, for example, a fund typically has sold a particular security at a loss and then bought it back again. “You not only disallow that loss, which is going to change the amount of realized gains and losses that you have by disallowing some of those losses, but it’s also going to change the holding period of the replacement trade,” said Michaels. “Now Section 1091(A) of the U.S. Internal Revenue Code states that the holding period has to be adjusted, but it doesn’t say by how much. There have been different interpretations on how to do that. That means two different accountants working on the same project and the same client might use two different rules for figuring out what the holding period is on the replacement trades in the wash sales. That’s just one example. Also, some people have more training, some people have more attention to detail, and some people have more experience. So as a result you can get fairly inconsistent results when you do this by hand.”
G2 FinTech holds what it calls “Hedge Fund Boot Camps” at conferences to educate attendees on how to cope with these kinds of transactions. The software also deals with classifying short-term versus long-term capital gains in the correct way to avoid IRS penalties.
“If you take $100 and you misclassify it as long term when it should have been short term, the IRS is going to be very grouchy about your underpaying your taxes,” said Michaels. “If they catch you misusing the Tax Code to try to do one of those conversions, they’ll not only slap interest and penalties on you, but perhaps even look at criminal intent if it was done deliberately.”