Part 4 — Tax Architecture & ROC Strategy

PART 4: TAX ARCHITECTURE & ROC STRATEGY

Framework Document Structure • Part 1: Foundation & Philosophy • Part 2: The Lineage & Macro Thesis Identification • Part 3: Bitcoin — Convexity Backbone • Part 4: Tax Architecture & ROC Strategy (this document) • Part 5: Portfolio Construction & Position Management • Part 6: Convexity & Framework Integrity Scoring

Tax Architecture & ROC Strategy

Tax friction compounds over time. Over multi-decade horizons, wrapper placement determines whether extreme appreciation becomes generational wealth or leaks a material share of terminal value to taxes (often 15–35%+, depending on income, NIIT, state taxes, and withdrawal profile). Wrapper engineering is not portfolio construction–it is the systematic routing of capital to wrappers that minimize friction, maximize compounding efficiency, and preserve right-tail outcomes.

Jurisdiction scope: This section uses U.S. tax wrappers (Roth IRA, taxable brokerage, pre-tax retirement accounts) as the reference implementation. The underlying engineering logic—routing convexity to the lowest-friction wrapper, maximizing tax-free compounding, and optimizing for terminal wealth—is portable across jurisdictions with different tax-advantaged account structures.

Part 3 established Bitcoin as the framework's convexity backbone–a structurally irreplaceable asset with 10-100× addressable market potential. Part 4 addresses the next engineering question: once convexity is selected, how do you preserve it? Wrapper placement determines whether extreme appreciation compounds tax-free or leaks 15-35%+ to taxes. This is not asset selection–it is capital routing designed to minimize friction and maximize terminal wealth after all tax costs.

Side note: While Bitcoin was built to behave like a currency, U.S. tax rules treat it as property—meaning capital gains apply today. If Bitcoin were ever exempted from capital gains, the tax advantages of many wrapper structures would matter less, and factors like custody, access, and convenience would dominate.

Wrapper Engineering North Star

Maximize Roth capacity for frictionless, deployable convexity.

The wrapper engineering north star: maximize Roth capacity for deployable convexity. Tax-free compounding over 30-60 year horizons dominates most other portfolio decisions for positions that may be rotated or rebalanced. Early Roth accumulation also controls future tax exposure by reducing pre-tax balances subject to Required Minimum Distributions or RMDs (forced taxable withdrawals beginning age 73, rising to 75 in 2033) and IRMAA surcharges on Medicare premiums. The flexibility to withdraw tax-free in any income environment—whether retirement brackets are 12% or 37%—eliminates decades of tax-regime risk. This does not mean converting blindly or filling Roth with never-sold positions; it means converting strategically within favorable brackets and reserving Roth for positions where tax-free trading provides structural advantage.

Wrapper Engineering as Structural Edge

Traditional advice defaults to pre-tax contributions ("maximize the deduction"), treats Roth accounts as supplementary vehicles for young investors, and uses taxable accounts as overflow when contribution limits are exhausted. This approach optimizes for current-year tax savings rather than terminal wealth.

Wrapper engineering recognizes a different mathematical reality: over multi-decade horizons, the differential compounding effects of tax treatment can exceed the returns generated by asset selection itself.

A mediocre asset in an optimal wrapper can produce superior terminal wealth compared to an exceptional asset in a suboptimal wrapper.

Why does this framework specifically include wrapper engineering as a structural edge? Because none of the intellectual lineage systematically addressed tax architecture as a dominant structural return multiplier:

Taleb focuses on payoff asymmetry, antifragility, and convex payoff structures but not tax-wrapper routing
Druckenmiller's concentration doctrine operates largely in institutional vehicles where personal tax wrappers are not a primary constraint
Soros emphasizes reflexivity, regime shifts, and position timing; tax architecture is treated as exogenous, not a design variable
Edelman advocates for investor education and crypto allocation inclusion but does not formalize wrapper optimization as a structural return multiplier for convex strategies

The framework fills this gap: it elevates wrapper selection from compliance exercise to engineering discipline, treating it with the same rigor applied to asset selection and position sizing. This is not traditional "tax optimization"—which typically means minimizing current-year liability. Wrapper engineering is a dominant structural return multiplier: the systematic routing of convexity to tax-free containers preserves and compounds alpha generated elsewhere. Over 40-60 year compounding horizons with right-tail outcomes, wrapper placement can generate wealth differentials exceeding the alpha produced by most active management strategies.

The Three-Wrapper Architecture

The framework deploys capital across three distinct wrapper types, each optimized for specific payoff profiles and portfolio functions.

Wrapper Type	Tax Treatment	Optimal Use Case
Roth Accounts	Tax-free forever	Torque convexity (10x-100x potential, may rotate)
Taxable Accounts	Tax on realized gains/distributions	Bitcoin backbone (never sold), STRC ballast, TLH satellites
Pre-Tax Accounts	Tax-deferred, taxed on withdrawal	Employer match, sporadic high-income arbitrage

The core insight: match expected payoff distribution and trading behavior to wrapper tax treatment. Torque positions (right-tail potential with possible rotation) belong in Roth where tax-free compounding and frictionless trading transform appreciation into generational wealth. Bitcoin (right-tail potential but never sold) belongs in taxable where basis step-up and borrow-against strategies preserve optionality without consuming scarce Roth capacity.

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Roth Accounts: Contributions with after-tax dollars. All appreciation compounds tax-free indefinitely. Withdrawals after age 59½ entirely tax-free (subject to qualified distribution rules, including the 5-year holding requirement). No required minimum distributions for the original owner. Passes to heirs tax-free, though non-spouse beneficiaries typically face required distribution timelines such as the 10-year rule. 2026 contribution limits: $7,500 individual ($8,600 if 50+), MAGI phaseout $153,000–$168,000 for single filers, $242,000–$252,000 for married filing jointly (Source: IRS Notice 2025-67, IRB 2025-49). Taxable Accounts: No contribution limits. Realized gains and distributions taxed in year recognized—qualified dividends and long-term capital gains at preferential rates (0%, 15%, 20% depending on income); interest and short-term gains as ordinary income. Basis step-up at death eliminates embedded gains (reflects current law; remains subject to legislative change). Full liquidity without age restrictions or penalties. Pre-Tax Accounts: Contributions reduce current income. Appreciation compounds tax-deferred. Withdrawals taxed as ordinary income (10-37% federal brackets in 2026). RMDs begin at age 73 (rising to age 75 in 2033 under SECURE 2.0). Heirs generally owe ordinary income tax on distributions (income in respect of a decedent). 2026 401(k) limit: $24,500 employee deferral ($31,000 if 50+; ages 60-63 may contribute $35,750 with enhanced catch-up per IRS Notice 2025-67).

Wrapper routing in practice: Capital arrival follows a hierarchical decision sequence. Match employer contributions first (instant 100% return), maximize Roth IRA second (tax-free convexity), then route remaining capital by position characteristics. The decision tree below operationalizes these priorities systematically.

WRAPPER ROUTING — DECISION TREE

NEW CAPITAL ARRIVES

STEP 1: Employer 401(k) Match Available?

✓ YES: Contribute to match threshold (Roth 401(k) if available; otherwise pre-tax) → Proceed to Step 2 ✗ NO: → Proceed to Step 2

Bracket gate: Very high marginal tax rates may favor pre-tax contributions with planned future Roth conversions (see Pre-Tax Bracket Arbitrage below). Employer match is typically pre-tax and plan-specific.

STEP 2: Eligible for Roth IRA Contribution?

✓ YES: Max Roth IRA ($7,500 in 2026) → Proceed to Step 3 ✗ NO (income exceeds limits): Use Backdoor Roth IRA → Proceed to Step 3

Backdoor Roth IRA = non-deductible traditional IRA contribution → immediate Roth conversion. Enables Roth IRA access at any income level. Note: Backdoor Roth IRA conversions are simplest when no other pre-tax IRA balances (including SEP or SIMPLE IRAs) exist; otherwise the pro-rata rule applies.

STEP 3: Route Remaining Capital by Position Type

Routing assumes position sizing obeys framework concentration limits (see Part 5).

Bitcoin (convexity backbone, never sold):

→ TAXABLE / COLD STORAGE (basis step-up, borrow-against optionality)

No rotation = no Roth benefit; preserve Roth capacity for Torque

Torque convexity (10x-100x potential, may rotate):

→ ROTH IRA (tax-free compounding + frictionless rotation)

If IRA maxed: Roth 401(k) bucket if available

Tactical/speculative positions (active rotation):

→ ROTH IRA (frictionless tax-free trading)

Momentum-driven, frequent rebalancing benefits from no capital gains

Income generation + liquidity (ROC, ballast):

→ TAXABLE (STRC, TLH capacity, unrestricted access)

Monthly distributions for deployment, basis step-up optionality

Sporadic high-income year (bracket arbitrage):

→ PRE-TAX 401(k) (capture deduction, convert later)

35-37% deduction today → convert to Roth at 22-24% in low-income years

Mega Backdoor Roth (401k): If your plan supports after-tax contributions + in-plan Roth conversion, see Mega Backdoor Roth in the Pre-Tax section below.

Roth Prioritization – Capturing Tax-Free Convexity

"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

— Attributed to Albert Einstein

Tax-free compound interest is the ninth wonder. The framework's cornerstone allocation principle: prioritize Roth accounts for highest-conviction convex positions.

Consider the mathematics:

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Scenario (Convexity Illustration): $7,500 lump-sum investment, 30-year horizon, 100× appreciation to $750,000 This thought experiment holds contribution timing constant to isolate wrapper tax friction on a single right-tail outcome. Roth outcome: $7,500 → $750,000 (100× appreciation) Withdrawals: $750,000 tax-free Net proceeds: $750,000 Taxable outcome (illustrative approach: borrow-against via SBLOC/PAL): $7,500 → $750,000 (100× appreciation) Borrow $300,000 against position (40% LTV) at 8% annually = $24,000/year interest Interest serviced from portfolio income (STRC, dividends) or external cashflow—no forced asset sales Over 20 years: $480,000 cumulative interest paid; loan balance remains $300,000 Asset value at death: $750,000; basis step-up may eliminate $742,500 embedded gain Estate repays loan: heirs receive $750,000 asset - $300,000 loan = $450,000 net Total economic access (time-separated): $300,000 lifetime liquidity via borrowing + $450,000 net to heirs = $750,000 gross value path, less $480,000 cumulative interest cost This outcome assumes uninterrupted debt service capacity and stable collateral value; failure of either converts deferral into forced realization. Rates float; lender can re-margin or demand repayment; forced liquidation risk exists if collateral declines or income stops. Pre-Tax outcome: $7,500 → $750,000 (100× appreciation) Withdrawals taxed as ordinary income (assume 24% effective federal bracket) Tax on withdrawal: $180,000 Net proceeds: $570,000 Wrapper comparison: • Roth: $750,000 tax-free, no interest drag, full liquidity without financing risk • Taxable (borrow-against): defers realization but incurs $480k interest over 20 years; net to estate $450k after loan payoff • Pre-Tax: $570,000 after 24% ordinary income tax—worst outcome Key insight: Roth eliminates both tax leakage and financing costs; taxable borrow-against can defer capital gains realization but introduces interest-rate risk, margin-call risk, and cumulative interest expense that erodes economic advantage unless portfolio income fully covers debt service. Note: LTCG rates vary by income (0%, 15%, 20%); state taxes additional. Borrow rates and terms vary by lender and creditworthiness. Interest deductibility depends on use-of-funds tracing and net investment income limitations, and may be partially or entirely disallowed.

Key Insight: Tax Wedge on Right-Tail Outcomes • Roth: ~100% of gains retained (no tax leakage) • Taxable: ~75-85% retained (15-23.8% LTCG+NIIT depending on income) • Pre-Tax: ~60-80% retained (ordinary income 10-37% on withdrawals) Tax wedge widens as returns increase—tax-free compounding dominates for convexity.

Roth as Optionality and Intergenerational Tool

Beyond tax-free compounding, Roth accounts provide structural optionality unavailable in pre-tax or taxable wrappers. The original Roth owner faces no required minimum distributions, eliminating forced withdrawals that trigger taxation regardless of financial need. Inherited Roth accounts typically follow a 10-year distribution window for non-spouse beneficiaries under current rules, but withdrawals remain tax-free when distribution requirements are met. This structure reduces timing risk (when will capital be needed?), tax-regime risk (what rates will apply decades hence?), and forced-distribution risk (compelled sales during market downturns). Roth wrapper selection trades immediate tax certainty for permanent flexibility across changing tax regimes, income levels, and multi-generational timeframes.

Critical implementation note: Structural advantages only matter if they are actually usable. In practice, wrapper constraints determine whether theoretical tax efficiency can be realized. Many employers offer Roth 401(k) options alongside traditional 401(k), enabling Roth contributions within workplace plans. However, 401(k) plans—even Roth buckets—typically restrict investment options to curated fund menus (target-date funds, index funds, limited equity selections). The framework requires self-directed investment capacity for thematic equity positioning and tactical rotation—flexibility typically available only in Roth IRAs, not employer 401(k) plans. Therefore, prioritize maxing Roth IRA contributions ($7,500 annually in 2026) before directing additional capital to Roth 401(k) buckets with limited investment universes.

The following allocation rules are not portfolio construction prescriptions; they illustrate how wrapper engineering governs capital routing once a convexity backbone has already been selected. Detailed position sizing, diversification, and rotation mechanics are addressed in Part 5.

The framework's Roth allocation strategy:

1. Roth capacity is scarce—reserve it for Torque. Annual Roth IRA contribution limits ($7,500 in 2026, $8,600 if age 50+) constrain tax-free capacity. The framework prioritizes Roth for high-conviction, high-turnover positions (Torque) where tax-free compounding and frictionless rotation generate maximum value. Positions with 10x-100x potential that may require tactical rebalancing, sector rotation, or thesis-driven exits belong in Roth—tax-free trading eliminates the friction that otherwise penalizes active conviction management.

2. Bitcoin is held outside Roth by default. The framework's convexity backbone (Bitcoin, governed by "never sell" discipline per Part 3) does not require Roth's tax-free trading benefit because it is not traded. Bitcoin's optimal placement is taxable account or cold storage, where basis step-up at death and borrow-against strategies (SBLOC/PAL) preserve optionality without consuming scarce Roth capacity. Bitcoin ETF (IBIT, FBTC, BITB) in taxable is acceptable when custody constraints or operational simplicity warrant; direct custody remains preferred where feasible. Bitcoin allocation targets and accumulation mechanics are determined at the household portfolio level, independent of wrapper routing for Torque positions.

3. Roth accounts balance conviction with discipline. Tax-free trading inside Roth eliminates rebalancing friction, which enables—but does not require—tactical rotation. The temptation to overtrade must be resisted. Roth's edge compounds geometrically over decades through sustained conviction, not through frequent flips. Rotation discipline (when to exit, when to trim, when to hold) is governed by CIS scoring frameworks detailed in Part 6. The goal: harvest Roth's structural advantage for positions where rotation may occur, while maintaining the patience that convexity requires.

4. Backdoor Roth conversions extend access regardless of income. High earners exceeding direct Roth IRA MAGI limits can contribute to a traditional IRA (non-deductible), then convert to Roth and pay taxes on any gains during the brief holding period. This strategy enables Roth access at any income level under current rules. Consult a tax professional for implementation specifics and to confirm eligibility given individual circumstances.

Investor profile: Age 35, $140,000 annual income (under Roth IRA MAGI limits), $7,500 annual Roth IRA limit, 30-year horizon. Bitcoin allocation maintained separately in taxable/cold storage per framework backbone governance. Years 1-5: Max Roth IRA ($7,500/year) → High-conviction Torque positions AI infrastructure (NVDA, ASML), defense modernization (LMT, RTX), emerging thematic plays Total invested: $37,500 in Roth; Bitcoin accumulated separately in taxable Years 6-15: Continue $7,500 annually to Roth, rotating as theses evolve Tax-free rotation enables rebalancing without friction penalties Positions exited at thesis breaks; gains reinvested without tax drag Years 16-30: Systematic contributions, sector rotation to emerging opportunities Using a hypothetical high-growth return path (for illustration only) Roth value at 30 years: ~$4.2M, zero taxes owed on gains or withdrawals Counterfactual (same positions in taxable): Same $4.2M terminal value, but multiple rotation events triggered LTCG taxes throughout. Cumulative tax drag: $400K-$600K+ depending on rotation frequency and bracket. Net after-tax: ~$3.6-3.8M. Wrapper differential: $400K-$600K+ (10-15% of terminal wealth) Note: This case study illustrates why Roth capacity is most valuable for positions that may be rotated. Bitcoin (held via "never sell" discipline) compounds in taxable without rotation friction, preserving Roth space for Torque. Actual returns depend on position selection and market conditions (addressed in Parts 5-6).

Taxable Accounts – STRC Ballast & Strategic Optionality

Taxable account priority: High-percentage ROC income instruments. The framework prioritizes taxable ballast positions that generate stable, high-percentage return of capital (ROC) distributions, ideally paid monthly for consistent liquidity. ROC distributions reduce cost basis rather than triggering immediate taxation, creating tax-deferred income that compounds basis step-up optionality. Monthly distributions enable systematic deployment into Bitcoin DCA, tactical position rotation, or lifestyle funding without forced liquidations. The ideal taxable ballast instrument combines: (1) high nominal yield (8-12%+ range), (2) substantial ROC characterization (verified annually via 1099-DIV), (3) monthly payment cadence, and (4) reasonable price stability near par value.

STRC as current best-in-class implementation: Strategy's perpetual preferred stock "Stretch" (ticker: STRC) currently represents the strongest available match to these criteria—though it is not structurally irreplaceable, and should be evaluated against Part 5 ballast criteria if superior alternatives emerge or its risk profile changes. STRC pays monthly dividends adjusting to approximately 11% annually, with distributions historically characterized as ROC (though tax treatment should be verified annually via issuer 1099-DIV reporting, as classification can change based on company operations). This ROC treatment means the ~11% received reduces cost basis rather than generating immediate tax liability—creating an effective yield advantage over traditional dividend stocks facing 15-23.8% annual taxation. If tax characterization changes, the after-tax yield adjusts accordingly, and the position's role within the framework should be monitored. #### STRC: Structure, Intent, and Risk Acknowledgment STRC ("Stretch") is designed to stretch purchasing power by converting balance-sheet leverage into high, recurring cash flow. It is not a bond, not cash, and not risk-free—it is a structured income instrument intended to trade some price volatility for sustained distributable yield. Structurally, STRC is a perpetual preferred stock subordinate to Strategy's debt obligations but senior to common equity. The yield derives from Strategy's capital structure and Bitcoin treasury exposure, with monthly dividend adjustments intended to anchor trading near $100 par value. This structure enables ROC treatment under certain conditions (verify annually via 1099-DIV) while exposing holders to issuer-specific and market risks. Explicit risks include: - Credit and issuer concentration risk: STRC's yield depends entirely on Strategy's financial health and capital management - Interest-rate and duration sensitivity: Rising rates or shifting credit spreads can pressure preferred valuations - ROC classification risk: Tax treatment can change based on issuer operations, converting tax-deferred distributions to taxable income - Correlation risk during Bitcoin stress: Bitcoin drawdowns may compress Strategy's distributable income and STRC's market price - No maturity / no par pull-to-redemption: Perpetual structure offers no guaranteed return of principal STRC's role, sizing constraints, and replacement logic if its risk profile changes are addressed explicitly in Part 5 under Ballast construction.

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STRC Effective Yield When ROC Treatment Applies: Nominal yield: Approximately 11% annually (monthly adjusted) Tax treatment (when ROC): Reduces cost basis rather than triggering current income tax Effective yield advantage: 11% received + deferred tax liability on basis reduction Example: $100,000 STRC position receiving $11,000 annual distribution characterized as ROC • Taxable dividend at 23.8% LTCG: $11,000 - $2,618 tax = $8,382 net (8.4% effective) • STRC ROC distribution: $11,000 received immediately, $0 current tax (11% effective) • ROC reduces cost basis from $100,000 to $89,000; creates deferred gain upon eventual sale • If held until death, basis step-up may eliminate deferred tax (though tax law can change) Result: When distributions qualify as ROC, STRC's effective yield materially exceeds traditional dividend stocks yielding 3-5% after tax

This is why STRC serves as the framework's ballast engine in taxable accounts—not despite its approximately 11% yield, but because of it. The combination of high nominal yield, potential ROC treatment, and basis step-up optionality creates a ballast position that generates income for tactical deployment while providing downside stability during equity/Bitcoin drawdowns. Tactical deployment mechanics: STRC distributions provide regular liquidity for opportunistic Bitcoin accumulation via DCA, rotating into newly elevated positions, or funding lifestyle needs without forced sales. When Bitcoin presents accumulation opportunities (valuation dislocations, model convergence on undervaluation, regime-driven capitulation), STRC income deploys systematically rather than requiring external cashflow or position liquidations. #### Tax-Loss Harvesting Within the Framework Tax-loss harvesting (TLH) provides permanent tax shields by realizing losses to offset gains or reduce ordinary income (up to $3,000 annually), with unlimited carryforward. However, not all positions are suitable TLH candidates. STRC and TLH incompatibility: When STRC distributions are characterized as ROC, they systematically reduce cost basis—a $100,000 STRC position receiving approximately 11% annual ROC has a cost basis of approximately $70,000 after three years. This declining basis makes realized losses impossible under normal market conditions. STRC is a hold-for-basis-step-up position, not a TLH vehicle. What belongs in taxable accounts for TLH capacity: The framework prioritizes Torque convexity (thematic positions with 10x-100x potential) in Roth, while Bitcoin and income-generating ballast reside in taxable. Taxable accounts thus hold Bitcoin (convexity backbone, never sold), STRC ballast, and tactical satellite positions—the latter two categories are potential TLH candidates. Framework-appropriate TLH targets include: - YieldMax covered-call ETFs (tactical satellite for ROC + TLH): High-distribution products like YieldMax MSTR Option Income Strategy ETF typically distribute substantial ROC (verify annually via 1099-DIV, as tax characterization can vary year-to-year based on fund operations). These positions are tactical satellites—not core ballast—combining ROC tax deferral with systematic price decay from covered call strategies, creating realized losses despite positive income distributions. When 20%+ losses accumulate, harvest and rotate to different underlying (MSTY → NVDY → TSLY) to avoid wash sale while maintaining covered-call income strategy. This is the framework's primary tactical income + TLH vehicle in taxable accounts, sized for satellite exposure rather than ballast-level concentration. - Direct spot Bitcoin in taxable accounts (non-wash sale advantage, regulatory risk): Some brokerages now offer direct spot Bitcoin investing in taxable accounts (availability varies by provider—verify before assuming access). Directly held bitcoin/cryptocurrency currently does not face wash sale restrictions under IRS rules, enabling immediate repurchase after loss harvesting without the 30-day wait—a significant tactical advantage unavailable with Bitcoin ETFs (IBIT, FBTC, BITB), which are securities subject to standard wash sale rules. However, this regulatory treatment may change as crypto markets mature and IRS guidance evolves. Framework preference remains DCA-and-hold for taxable Bitcoin to preserve compounding, but TLH can be utilized during 40-50%+ dislocations when model convergence indicates undervaluation. Note: Direct custody Bitcoin within IRA accounts is not widely available; Bitcoin IRA exposure typically requires ETF wrappers (IBIT, FBTC, BITB). Verify current options with your custodian. - Other ROC-focused income vehicles (tactical satellite positions): Beyond STRC ballast (incompatible with TLH due to declining basis) and YieldMax ETFs, the framework may deploy tactical capital to additional ROC-generating positions: certain energy MLPs with ROC distributions, closed-end funds (CEFs) employing managed distribution policies, or REITs with depreciation exceeding taxable income. These positions combine tax-deferred income with potential TLH capacity during sector rotations or market dislocations. Position selection (detailed in Parts 5-6) prioritizes ROC treatment over qualified dividends, which face immediate annual taxation at 15-23.8% rates without basis reduction benefits. Systematic TLH protocol: Quarterly review taxable account positions for >20% unrealized losses. If thesis remains intact (determined by scoring frameworks in Part 6), harvest loss and immediately deploy into substantially similar but non-identical position. If thesis breaking, harvest loss and redeploy capital to higher-conviction opportunities. Maintain spreadsheet tracking harvested losses—these are permanent tax assets with unlimited carryforward, sheltering future gains across decades.

Taxable account structure: $200,000 total allocation STRC ballast (70%): $140,000 in STRC preferred Generates approximately $15,400 annual distributions (when characterized as ROC) Cost basis declines approximately $15,400 annually under ROC treatment Distributions deployed to Bitcoin DCA during dislocations TLH-eligible positions (30%): $60,000 in diversified holdings • $30,000 defense modernization (LMT, RTX) • $30,000 AI infrastructure (NVDA, ASML) Year 1 outcome: AI infrastructure declines 25% ($30,000 → $22,500). Thesis remains intact, temporary market dislocation. Harvest $7,500 loss, immediately rotate to TSMC (substantially similar semiconductor exposure, avoids wash sale). Bank $7,500 loss carryforward. Year 3 realization: Accumulated $18,000 in harvested losses from multiple positions over three years. Exit Torque position (thesis break) with $75,000 embedded gain. Tax calculation: $75,000 gain - $18,000 loss offset = $57,000 taxable gain. Tax owed: $13,566 (23.8%). Without TLH: $17,850 tax. TLH savings: $4,284 (24% tax reduction) Key insight: STRC provides stable ballast generating approximately 11% effective yield (when ROC treatment applies) for deployment. Satellite positions enable systematic TLH, creating permanent tax shields offsetting future gains. Combined structure balances income generation, tactical flexibility, and tax optimization.

#### Margin as Taxable-Account Optional Overlay Margin is a conditional positive-carry overlay available in taxable accounts, not a structural assumption or return driver. When STRC or other income-generating positions produce yields exceeding margin borrowing costs, the spread creates positive carry under stable conditions. This is not arbitrage—it is a tactical overlay that functions only when borrow rates remain below distributable yields, a relationship that is regime-dependent and non-permanent. Margin is a privilege extended by brokers that can be withdrawn or repriced during stress. The framework treats margin as optional, non-core, and revocable. Break-even intuition: effective yield (after ROC treatment) minus tax drag minus margin borrow rate must remain positive. Example: STRC yielding 11% effective (when ROC applies), margin rate 8.5%, spread ~2.5% before consideration of mark-to-market risk, margin call risk, and issuer-specific concentration. This spread is path-dependent—it exists today but may compress or invert during rate cycles, credit stress, or broker policy changes. Margin use is explicitly optional and not required for the framework to function. Explicit risks of margin overlay: - Borrow-rate risk: Margin rates float and can spike during volatility or Fed tightening cycles - Mark-to-market / margin call risk: Collateral value declines trigger forced liquidations at inopportune times - Issuer-specific concentration: Using margin to amplify STRC exposure increases single-issuer risk - Liquidity and regime risk: Margin availability can disappear during systemic stress when needed most Margin sizing constraints, maximum leverage ratios, and deleveraging tripwires are addressed in Part 5 under Ballast construction and risk management protocols. #### Options in Roth Accounts: Purchased Convexity Only Roth accounts permit options trading with strict limitations under the framework: purchased convexity only (long calls, long puts, defined-risk spreads), never undefined-risk strategies (naked options, short vol, leverage amplification). Options represent optional tactical overlays for expressing high-conviction theses with capped downside—not core holdings or income generation mechanisms. Purchased options are negative-expected-value instruments most of the time (premium decay exceeds realized gains), justified only when thesis conviction warrants defined-risk asymmetric exposure. Example: long-dated calls on AI infrastructure names during early adoption phase, long puts as portfolio insurance during systemic stress signals. Hard cap: 3-5% of Roth account value measured as maximum loss at entry (premium paid). If $75,000 Roth account, maximum options allocation: $3,750 at-risk capital. Philosophical anchor: survivability > profitability. The Roth account must not be positionable to fail. Purchased options lose 100% in many scenarios—acceptable when sized appropriately, catastrophic when oversized. The framework prohibits naked options, undefined-risk positions, or strategies that could impair account survivability regardless of probabilistic edge. Strategy selection, entry/exit discipline, and position sizing protocols addressed in Part 5. --- ## Pre-Tax Accounts – Mathematical Inferiority & Tactical Use Cases Pre-tax accounts face structural disadvantages for long-duration convex strategies. The mathematics are unforgiving. #### The Pre-Tax Disadvantage: Quantified

Key Insight: Pre-Tax Balances Are Gross, Not Net A pre-tax account balance represents a joint claim between the investor and the tax authority, with taxes deferred—not eliminated. As returns compound, the absolute dollar value of the future tax obligation compounds alongside them. For high-growth, convexity-driven strategies, this embedded tax claim grows proportionally with terminal value, reducing net ownership. Roth accounts eliminate this joint-ownership structure by paying taxes upfront, converting all future appreciation into fully owned capital.

The compounding effect of ordinary income taxation versus preferential LTCG treatment creates permanent wealth destruction in pre-tax accounts for high-appreciation positions. This differential compounds significantly over multi-decade horizons. Additional pre-tax disadvantages: - Required Minimum Distributions (RMDs): Beginning at age 73 (rising to age 75 in 2033 under SECURE 2.0), pre-tax accounts force annual withdrawals calculated as percentage of account balance, triggering ordinary income taxation regardless of financial need. Roth accounts face no RMDs for the original owner, and taxable accounts have no distribution requirements, preserving compounding optionality. - No basis step-up at death: Heirs inherit pre-tax accounts with full tax liability (ordinary income on all distributions). Taxable accounts receive basis step-up, eliminating embedded gains. Roth passes tax-free. Pre-tax creates permanent intergenerational tax burden. - Inflexible liquidity: Pre-tax withdrawals before age 59½ face 10% penalty plus ordinary income tax. Taxable accounts have zero restrictions. Roth contributions (not gains) can be withdrawn penalty-free anytime. Pre-tax liquidity is structurally inferior. #### When the Framework Uses Pre-Tax: Tactical Optionality Despite structural inferiority, pre-tax accounts offer specific use cases where they generate positive value: 1. Employer matching (always capture): If employer offers 401(k) matching, contribute enough to capture full match. This is 100% immediate return that dominates wrapper suboptimality. Contribute to match threshold, then redirect capital to Roth IRA and taxable.

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Example: Employer matches dollar-for-dollar up to 6% of salary ($100,000 salary = $6,000 match) Contribute $6,000 to 401(k) → Receive $6,000 match (100% return) Even if withdrawn at 24% tax decades later, net proceeds: $9,120 If never contributed: $0 Match advantage: $9,120 vs $0 = infinite ROI Never leave employer match on the table. Pre-tax wrapper inferiority is dominated by free money.

2. Sporadic high-income years (bracket arbitrage): Unusual income spikes (business sale, inheritance, RSU vest, contract windfall) pushing into 35-37% brackets when typical bracket is 22-24% create arbitrage opportunities.

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Example: Typical income $120,000 (24% bracket) → Windfall year $600,000 (37% bracket) Maximize 401(k): $24,500 contribution Immediate tax savings: $9,065 (37% of $24,500) Future conversion: In low-income year, convert to Roth at 22-24% rate Arbitrage capture: 13-15% bracket differential on $24,500 = $3,185-$3,675

#### Mega Backdoor Roth (401k) — When Available Distinct from Backdoor Roth IRA (which uses traditional IRA → Roth IRA conversion), Mega Backdoor Roth operates within a 401(k) plan. It requires two plan features: (1) after-tax contributions beyond the standard employee deferral limit, and (2) in-plan Roth conversion or in-service rollover to Roth IRA. If both are available, after-tax contributions can be immediately converted to Roth, extending annual Roth capacity well beyond the $7,500 IRA limit—up to the 2026 IRC 415(c) annual additions limit of $72,000 (includes employee deferrals + employer contributions + after-tax contributions, subject to plan-specific rules). This enables systematic Roth-building at scale for those with qualifying plans. Availability depends on plan design, testing outcomes, and permitted conversion/rollover features; confirm with plan administrator.

Profile: Senior consultant, age 42, typical $120,000 income (22% bracket), employer 401(k) with 4% match Baseline year: Contribute $4,800 to 401(k) (4% of salary) → Capture $4,800 match (100% return) Max Roth IRA separately: $7,500 Note: At $120,000 income, well under Roth IRA MAGI limits ($153,000-$168,000 single), direct contribution allowed Deploy remaining capital ($35,000) to taxable for STRC ballast + flexibility Windfall year: Consulting contract $480,000 + base $120,000 = $600,000 total income (37% bracket) Now exceeds Roth IRA MAGI limits significantly Maximize 401(k): $24,500 → Realize $8,695 immediate tax savings (37%) Backdoor Roth IRA: Contribute $7,500 to traditional IRA (non-deductible), immediately convert to Roth, pay tax on conversion gains (minimal if immediate) After-tax 401(k): If plan allows, contribute additional after-tax within $72,000 total limit (IRC 415(c)), immediately convert to Roth 401(k) Total Roth space created: $7,500+ that now compounds tax-free Reversion year: Income returns to $120,000 baseline (22% bracket), back under Roth IRA limits Contribute only employer match ($4,800), resume direct Roth IRA contributions ($7,500) In low-income years, systematically convert traditional 401(k) balance to Roth IRA at 22-24% rates, locking in bracket arbitrage from windfall year Key insight: Pre-tax accounts are inferior for long-duration convexity but offer tactical value: employer match (always), bracket arbitrage (high-income years), mega backdoor Roth (when available). Use situationally, default to Roth + taxable for strategic capital.

#### Legislative Risk and Framework Resilience Tax rules can change. Roth contribution limits, income thresholds, distribution requirements, and tax-free treatment are subject to legislative modification. Pre-tax deduction rules, RMD ages, ordinary income brackets, and capital gains rates face similar uncertainty. The framework does not assume tax law permanence. Instead, it prioritizes multi-wrapper diversification and tactical flexibility to minimize worst-case outcomes across plausible policy scenarios. Roth accounts have already paid taxes at known rates; adverse rule changes would represent incremental taxation on previously-taxed capital. Pre-tax accounts have deferred all taxation; adverse changes simply accelerate or increase liabilities that were always present. The framework maintains Roth prioritization not because Roth rules are guaranteed permanent, but because Roth structures exhibit more favorable risk asymmetry under legislative uncertainty than alternatives. Tactical conversion capacity (pre-tax to Roth during low-income years) and multi-wrapper allocation preserve optionality to adapt as rules evolve. --- Wrapper engineering compounds silently, geometrically, and permanently. Asset selection drives returns. Wrapper selection determines how much of those returns you keep. That distinction—between generating gains and preserving gains—separates mediocre long-term outcomes from generational wealth.

End of Part 4: Tax Architecture & ROC Strategy Part 4 establishes wrapper engineering as a dominant structural return multiplier, governing how capital is routed once a convexity backbone is selected. The framework prioritizes routing deployable convexity to the lowest-lifetime-friction wrapper while assigning structurally static assets to vehicles optimized for long-duration holding. These wrapper decisions define architecture, not allocation; position construction, sizing, and rotation discipline are addressed in Parts 5–6. The framework's wrapper logic adapts to other jurisdictions by substituting local tax-advantaged structures while preserving the core principle: route convexity to the wrapper with the lowest lifetime tax friction. Continue to Part 5: Portfolio Construction & Position Management Translates wrapper-optimized architecture into concrete position construction across three behavioral postures.

This framework does not constitute tax, legal, or financial advice. Consult qualified professionals for your specific situation.

Part 3 — Bitcoin: Convexity Backbone Part 5 — Portfolio Construction & Position Management