What it is:
How it works (Example):
Tax shelters are often used to take advantage of tax arbitrage opportunities. For example, a person or business might open an account in a certain country or create a certain legal structure so that the income that flows from these investments is taxed at a more favorable tax rate.
The simple fact that the IRS taxes different types of income streams at different rates creates tax arbitrage opportunities every day. For example, investors might choose to put extra cash into stocks rather than bonds because the tax rate on capital gains is lower than the tax rate on earned interest. In the broadest sense of the word, any tax planning can be viewed as tax arbitrage.
Why it Matters:
Tax rules and guidelines are complex, and few people want to pay more taxes than they have to. Many people and organizations structure transactions and accounts in the most advantageous way possible.