If you need access to cash, you have three basic options:
- Use cash you have on hand
- Sell assets you own
- Borrow money
Today we're focusing on borrowing money using assets that you own, specifically, a lesser-known strategy called a box spread loan.
Why borrow instead of sell?
When you sell assets to raise cash, you trigger taxes and pull money out of the market. Borrowing lets you:
- Keep your investments compounding
- Preserve your emergency fund
- Avoid a taxable event
What Is a Box Spread Loan?
A box spread is a way to borrow money against a taxable investment account, without going through a bank. It's technically a set of four options contracts that provide you funds upfront, with a fixed repayment date. Because banks aren't involved, you skip the approval process and the middleman markup.
This strategy has historically been used by family offices and high-net-worth investors, but it's becoming more accessible, provided you have meaningful assets in a taxable brokerage account to use as collateral.
The Interest Rate Advantage
The rate you pay is largely tied to the SOFR (Secured Overnight Financing Rate). Current rates for terms up to five years are running in the 3.85%–4.12% range.
Compare that to the alternatives that are likely around 6-11%:
- Home equity line of credit
- Margin loan
- Securities-backed line of credit
The savings add up fast.
The Tax Benefit
The "interest" you pay is treated as a capital loss for tax purposes, broken down as 40% short-term and 60% long-term. That loss can:
- Offset capital gains you've realized during the year
- Deduct up to $3,000 of ordinary income
- Carry forward indefinitely until fully used
How It Works
The four options contracts establish a ceiling and a floor, effectively "boxing in" the outcome. Here's the simple version:
- Today: receive funds in your account from the options you sold
- At the set repayment date: you pay back a higher amount from the options you buy
- The difference between those two amounts = your effective interest cost
SPX (S&P 500 index options) are commonly used due to their high liquidity and favorable tax treatment as non-equity options.
Key Risks to Understand
This isn't a strategy you jump into blindly. A few important things to know:
- Margin requirements, you must maintain sufficient assets at all times. Limiting borrowing to 50% of your account value is a reasonable starting point, which can generally withstand a 35% market drop without triggering a margin call
- No monthly payments, unlike a traditional loan, there are no installments. You need to have the funds available at the end of the term
- Rate resets on renewal, if you roll into a new contract, your rate resets to wherever the market is at that time
Common Uses
Box spread loans are flexible. Some of the most common ways people use them:
- Bridge loan, cover the gap while in between selling and buying a home
- Finance a home or car purchase, use the funds at advantageous terms instead of traditional financing
- Fund a business or investment, deploy capital without liquidating your portfolio
- Refinance existing debt, swap out higher-rate debt for a lower effective interest rate
- Working capital, cover a surprise tax bill or short-term cash need while waiting for other income to arrive
The reason you choose to use the funds is totally up to you.
Wrapping It Up
If you have a taxable investment account and are looking for a low-cost way to access liquidity without selling assets or triggering taxes, this is worth exploring. That said, the risks, mechanics and margin rules are complex, work with a professional before moving forward.
Feel free to reach out if you'd like to talk through whether this strategy makes sense for your situation.
