What Is Accommodation Trading?
Accommodation trading is a type of trading in which one trader accommodates another by entering into a non-competitive purchase or sale order. The instance of accommodation trades often happens when two traders are participating in illegal trading. Certain types of accommodation trades can also be known as wash sales.
Understanding Accommodation Trading
An accommodation trade could occur when two traders agree to exchange stock for a price well below the market value of the asset. This exchange allows the seller to realize a considerable investment capital loss on the shares for tax purposes. Later they can reverse the trade.
Accommodation trading is illegal in most countries. Accommodation trading appears in the same situations where money laundering is detected. It is also a tip-off to the financing of terrorist or other criminal organizations.
There are varieties of permitted accommodation trading under securities law. For example, a cabinet trade is a type of accommodation trade in which the option holders can erase an open position from their ledger for the price of 1 cent per share, or $1 per contract.
Example of Illegal Accommodation Trading
For example, suppose Bob, an investor, purchased stock in Company Z at $40 per share. With the tax season approaching, Bob decides to sell the stock to Jill for $25, even though the shares are currently trading in the open market at $50. Bob uses this technique to realize a capital loss of $15 per share on his taxes, and he uses it to lower the taxes paid on capital gains on his other investments. After Bob files his taxes, Jill sells the stock back to Bob for $25 per share. In essence, the trade allows Bob to cheat the tax system because he never actually lost any real value on the stock; he manufactured the trade with the intent of paying less tax.
What is a Cabinet Trade?
A cabinet trade is a type of allowable accommodation trade that investors can make if they have an open long or short option position that has become essentially worthless, or out of the money. The investor holding the option is allowed to clear the position from their book for either 1 cent per share or $1 per contract.