Unless you speak the language fluently, the world of economics, finances, and taxes can seem rather difficult. If you’ve obtained your CPA or some sort of financial license then these industries are something that you’ve been trained on and that you understand, but if you haven’t then it often seems like people are speaking an entirely different language. To prove this point let’s look at the financial and economic term arbitrage. In the broadest sense, when people are referring to arbitrage they’re generally talking about the profits that are made when someone is able to take advantage of different prices between two markets for a specific product. For example, if you can buy something in one state at one price and then sell it for a higher price in another state, the profit you would make off of that transaction would be known as arbitrage. There are very strict rules that govern this type of financial transaction, and it’s actually even illegal in some cases depending on a specific state or country’s laws.
In finance, when you hear people talking about arbitrage calculation and arbitrage rebate, they’re generally not talking about the kind of arbitrage that was just mentioned above. What they’re typically discussing is the practice of making money by taking the profits obtained from tax-advantaged and low-yielding bonds and then investing that money into securities and other high risk, but potentially high reward, investments. Most people understand that bonds are tax-advantaged, meaning you pay lower taxes on them but they’re a steady source of profit. However, if you take the money from these tax-advantaged bonds and turn it into more money by investing it into higher-risk investments, then the profit you’re making is what’s called arbitrage. There are very unique rules that govern this kind of financial transaction, and they’re written in such a way that their actual goal is to discourage people from doing this kind of thing.
As you can see, this issue is rather complicated, but by now you should at least have a basic understanding of how arbitrage works in the financial and investment world. Thus, arbitrage calculation is simply the practice of figuring out what an individual or organization’s arbitrage profit was in a given year. If this sounds like something that only the most talented accountants and professionals would be able to do, that’s because it is. There’s a reason why firms like Arbitrage Compliance Specialists are in such high demand. There simply aren’t that many professionals out there who are equipped to do this kind of accounting, and thus the ones who are really good at it end up doing a great deal of business.
As you can see, arbitrage calculation and the corresponding arbitrage rebate are incredibly complex tax issues. Since the consequences for not reporting this kind of income tend to be very steep, it’s best that if you believe you’ve made money off of arbitrage this year that you hire a firm like ACS to do all of your calculations for you.