How the Wealthy Save Billions in Taxes by Skirting a Century-Old Law(propublica.org)
propublica.org
How the Wealthy Save Billions in Taxes by Skirting a Century-Old Law
https://www.propublica.org/article/irs-files-taxes-wash-sales-goldman-sachs
167 comments
You are right that it defers, but does not eliminate, taxes; however:
1. You can use losses to offset $3k of ordinary income per year.
2. Tax deferral is still advantageous. For example, you can defer until retirement when your tax bracket is lower, and also allow that amount to compound in the meantime.
3. If you die, your heirs get a step up in basis, so the tax is in fact ultimately avoided.
1. You can use losses to offset $3k of ordinary income per year.
2. Tax deferral is still advantageous. For example, you can defer until retirement when your tax bracket is lower, and also allow that amount to compound in the meantime.
3. If you die, your heirs get a step up in basis, so the tax is in fact ultimately avoided.
For a billionaire, (1) and (2) seem basically irrelevant; if they're loopholes at all, they seem to favor the non-billionaires. That leaves us with (3), which baffles me - if the cost basis is allowed to rise without paying any taxes (?!) then isn't that the real source of the problem, rather than the wash sale? I feel like I must be missing something here - why get angry over wash sales and prohibit them if the real issue is something else entirely? Shouldn't inheritance basis step-up be the real subject of discussion?
Number 2 is definitely not irrelevant for billionaires, perhaps especially for billionaires. Deferring taxes means that your investments can achieve faster compound growth.
See the "Financial Impact of Tax Deferral" section in this article, https://www.securitybenefit.com/tax-center/article/how-tax-d....
See the "Financial Impact of Tax Deferral" section in this article, https://www.securitybenefit.com/tax-center/article/how-tax-d....
Compounding isn't a magic potion that gets you infinitely wealthy though. The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M? We're worried about $10M for someone who has $85B in assets? How much of the $85B do you believe consists of compounding from that $10M?
I literally have no idea what you mean by your numbers. "The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M?" I don't understand this at all.
If you're trying to take advantage of a lower retirement income bracket post-retirement, that's only valuable for < $400k of income/year. Anything after that will be at the highest bracket. Over the course of your post-retirement life that seems to come out to something on the order of $10M in tax savings. Which wouldn't really amount to much for someone with $85B in assets.
It's not only about being in a lower tax bracket in retirement. Tax deferral means that your compounding rate of return will be faster now before you retire, because instead of giving money to the government you can invest it in something that produces a return. I think the section of the article I linked explains it pretty well.
The article does not explain anything. There's no math to back it up either. From what I understand, the difference in the compounding rate of return is actually 0 at all time if you add the liquidation tax liability (which you have to) as a negative value to the net worth graph. The only benefit is that tax brackets (might) go down, which is exactly what people are saying.
I get that. But how much do you think $10M right now would compound to? How would that compare against an >$80B net worth?
More than that: we are talking about stock sales. Long term sales are not part of tax brackets. 18% flat right now, until the law changes. And it can only increase, since we are now in a middle of mad deficit spending. So deferring taxes has it’s own risks.
> 18% flat right now
No, it is not. It adds 5% when you cross into the top tax bracket.
No, it is not. It adds 5% when you cross into the top tax bracket.
> if the cost basis is allowed to rise without paying any taxes (?!)
It's a common misconception that the step-up in basis means the heirs don't pay taxes, and therefore the billionaires are giving us the biggest shaft.
The heirs pay estate tax, and once they pay the tax, the basis resets. It would be very unfair if it didn't. However, the tax exemption for the estate tax is quite large (about $13MM for federal for 2023, but going to $7MM in 2026).
For billionaires though, the estate tax exemption is negligible. The heirs end up paying estate tax for everything they inherit minus $13MM, which is nothing for them.
So, again, if this benefits anyone, it's the less rich people.
It's a common misconception that the step-up in basis means the heirs don't pay taxes, and therefore the billionaires are giving us the biggest shaft.
The heirs pay estate tax, and once they pay the tax, the basis resets. It would be very unfair if it didn't. However, the tax exemption for the estate tax is quite large (about $13MM for federal for 2023, but going to $7MM in 2026).
For billionaires though, the estate tax exemption is negligible. The heirs end up paying estate tax for everything they inherit minus $13MM, which is nothing for them.
So, again, if this benefits anyone, it's the less rich people.
Thanks, that makes a lot more sense now. Then we go back to my initial question - where exactly is the loophole here? The tax is being deferred, not avoided entirely. Yet the article makes it seem like they somehow avoid it?
They do not want to tell you: we want to close this tax planning possibility that everyone - including you - can use. So they tell you: Steve Balmer, loophole, avoidance!
The original “wash sale” prohibition is pretty unfair and damaging to every single stock owner. Since it does not hold water mathematically, it’s prone to loopholes. You need to spend more time to find loopholes - so only wealthy tend to benefit from them. You want to make stock ownership more “equitable” - repel the original “wash sales” law.
The original “wash sale” prohibition is pretty unfair and damaging to every single stock owner. Since it does not hold water mathematically, it’s prone to loopholes. You need to spend more time to find loopholes - so only wealthy tend to benefit from them. You want to make stock ownership more “equitable” - repel the original “wash sales” law.
I agree with all of that. Hand wringing over tax loss harvesting seems silly to me.
I think there are very good historical reasons for basis step-up, namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets. But since brokerages have to track basis since 2012, it would seem easy to, at least, disallow basis step-up for securities that have cost basis information held by the brokerage.
I think there are very good historical reasons for basis step-up, namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets. But since brokerages have to track basis since 2012, it would seem easy to, at least, disallow basis step-up for securities that have cost basis information held by the brokerage.
I've argued that heirs, if they don't have proof of the basis, should have to treat the basis as 0.
Why should the basis be what it is today vs zero? It's pretty simple, if person dies on day N, and we know what we would tax the item as if he sold it on day N-1, then we should be able to know what we should be able to tax it at if sold by the heirs on day N+1.
Zero would acknowledge that the heirs paid literally zero for it. conversely, if the the asset tremendously rose in value (i.e. an order of magnitude or more). then even with knowing the cost basis, one can effectively treat the cost basis as zero without significant effect on the heir (i.e. at a 33% tax rate, if it grows by an order of magnitude and you treat it as 0, instead of 10% of the current value, you only increased the amount of tax paid by 3.3% of the value). If it grows by even more than an order of magnitude, than the percentage drops (2 orders of magnitude and you are at 1/3 of a percent extra vs treating it as zero).
i.e. there really isn't much of a loss to the heir if one has to treat the asset as zero cost basis. and one can always provide said cost basis in the cases where the asset growth can't be measured in even a single digit order of magnitude (but once one breaks a single digit, then there's very little loss to the heir).
In general, I dislike trying to treat different assets classes differently, the rule should be no step up, track cost basis or you as the heir have to treat it as zero.
Why should the basis be what it is today vs zero? It's pretty simple, if person dies on day N, and we know what we would tax the item as if he sold it on day N-1, then we should be able to know what we should be able to tax it at if sold by the heirs on day N+1.
Zero would acknowledge that the heirs paid literally zero for it. conversely, if the the asset tremendously rose in value (i.e. an order of magnitude or more). then even with knowing the cost basis, one can effectively treat the cost basis as zero without significant effect on the heir (i.e. at a 33% tax rate, if it grows by an order of magnitude and you treat it as 0, instead of 10% of the current value, you only increased the amount of tax paid by 3.3% of the value). If it grows by even more than an order of magnitude, than the percentage drops (2 orders of magnitude and you are at 1/3 of a percent extra vs treating it as zero).
i.e. there really isn't much of a loss to the heir if one has to treat the asset as zero cost basis. and one can always provide said cost basis in the cases where the asset growth can't be measured in even a single digit order of magnitude (but once one breaks a single digit, then there's very little loss to the heir).
In general, I dislike trying to treat different assets classes differently, the rule should be no step up, track cost basis or you as the heir have to treat it as zero.
> namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets
But then can't they assume the cost basis is $0 if they can't provide documentation to back up something higher? I thought that's how it works in general when you don't have cost basis information available.
But then can't they assume the cost basis is $0 if they can't provide documentation to back up something higher? I thought that's how it works in general when you don't have cost basis information available.
Sure, but that's probably going to unfairly impact the poor. Imagine a family of poor immigrants, where the father worked very hard and saved and left some asset to his non-rich children...you want to punish the children when the father dies suddenly and the children have no idea where to find cost basis information? There are pros and cons to any policy.
you can also limit step up cost basis, similar to how the "estate tax" is limited (and is high enough that even "normal" rich people aren't event impacted by it. But I'd limit the step up stricter than that. imagine the step up would be limited to 1-2mil of stepped up assets. poor people would still be able to benefit, nominally middle class/well to do upper middle class would also mostly benefit, but the rich would find the benefit effectively go to zero for them as their assets rise.
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> Hand wringing over tax loss harvesting seems silly to me.
It seems very pertinent to me. Taxes pay for the common good.
If people are using loopholes or workarounds to not pay tax, then the common good suffers.
And we all benefit from the common good, even, maybe perhaps _especially_ the billionaires whose companies receive subsidies, or contracts from the government.
It seems very pertinent to me. Taxes pay for the common good.
If people are using loopholes or workarounds to not pay tax, then the common good suffers.
And we all benefit from the common good, even, maybe perhaps _especially_ the billionaires whose companies receive subsidies, or contracts from the government.
I as a average 1-job salary earner really enjoy the tax loopholes of my IRA and 401k.
A portion of taxes goes to the common good, another portion goes to graft and politicians per projects that accomplish nothing; sometimes both at the same time. Maybe we fix that first.
Seems like being tax efficient to me.
People realize the 401k was once a “loophole”? Some CPA found the law and started to use it and everyone piled on.
People realize the 401k was once a “loophole”? Some CPA found the law and started to use it and everyone piled on.
Re 2 - we are talking about stocks, they are taxed independently of your tax bracket. Tax % on stocks changes only when law changes, and this can only rise, given our current situation.
Overall, the article is against tax planning, picturing it (deliberately? due to math incompetence?) as tax avoidance. You do not need to be Steve Balmer to wish to use some tax planning, ask me how I know - and I am just a software engineer.
Overall, the article is against tax planning, picturing it (deliberately? due to math incompetence?) as tax avoidance. You do not need to be Steve Balmer to wish to use some tax planning, ask me how I know - and I am just a software engineer.
It's more like this: stock A offers exposure to X (say resource extraction, pharma, tech, small cap growth.. whatever). Stock A also went down in value this tax year but you're still confident in your investment thesis, so you find stock B, which also has similar exposure, this could be a different ETF, a different company or even a different class of shares in the same company (sell GOOG buy GOOGL). You sell A to create a loss on paper and purchase B with your proceeds. This allows you to create paper losses to offset your tax liability from any sales that produced capital gains while keeping, roughly, the same allocation without violating the wash sale rule.
I guess perhaps what I'm not quite understanding is why wash sales are disallowed in the first place - because, again, if you lower the cost basis, you will be liable for the difference in the future, so why does it make a net difference?
The intent of disallowing wash sales is to stop people from gaming the system to strategically realize "fake" losses in one security to offset gains. If we allowed wash sales you could make 100 dollars in profit from your sale of stock A and then wash sale 10 shares of stock B at 10 dollars, down from 20 and say you made no money this year, when, effectively you made 100 dollars and you still have the same number of shares of stock B.
The intent of performing the wash sale isn't to reduce your liability from proceeds of the future sale of whatever security you're trying to "wash", it's to use the wash to offset this year's gains from the sale of other securities.
The intent of performing the wash sale isn't to reduce your liability from proceeds of the future sale of whatever security you're trying to "wash", it's to use the wash to offset this year's gains from the sale of other securities.
You're not accounting for the reduction in cost basis that would increase your future taxes though?
Like some other commenters have called out it kind of just kicks the can down the road, but the longer you can kick that can down the road the longer you can reap the benefits of compound interest.
I get that part but the difference in compound interest still seems too small compared to their multi-billion-dollar assets. The real issue seems to be inheritance tax cost basis step-up, if I'm understanding correctly. Which would explain why generational wealth is such a bigger deal than people give it credit for.
Yes, you and I would have reaped the benefits of compound interest - if the “wash sales” law is repealed. What’s wrong with that?
A couple of things wrong with wash sales:
1) I can't reap the benefit, because I don't have enough income to save for retirement (outside of my pension). If I did, like most people, I'd likely be saving in something like a 401(k) that is tax-deferred. Tax-deferred retirement accounts, by law, gain no additional tax benefit from a wash trade. https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
2) You incentivize people to sell and buy additional securities outside of their normal investment planning. This will have a market distorting effect when compounded over many, many stockholders.
1) I can't reap the benefit, because I don't have enough income to save for retirement (outside of my pension). If I did, like most people, I'd likely be saving in something like a 401(k) that is tax-deferred. Tax-deferred retirement accounts, by law, gain no additional tax benefit from a wash trade. https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
2) You incentivize people to sell and buy additional securities outside of their normal investment planning. This will have a market distorting effect when compounded over many, many stockholders.
I think they defer as much as they can until they die and their heirs get to inherit with a stepped up cost basis and they never pay tax. Borrow, buy, die.
If they’re really crafty, the heirs will overvalue assets when stepping up the cost basis so they can actually claim losses in the future.
From Wikipedia:
“The tax code of the United States holds that when a person (the beneficiary) receives an asset from a giver (the benefactor) after the benefactor dies, the asset receives a stepped-up basis, which is its market value at the time the benefactor dies (Internal Revenue Code § 1014(a)).”
If they’re really crafty, the heirs will overvalue assets when stepping up the cost basis so they can actually claim losses in the future.
From Wikipedia:
“The tax code of the United States holds that when a person (the beneficiary) receives an asset from a giver (the benefactor) after the benefactor dies, the asset receives a stepped-up basis, which is its market value at the time the benefactor dies (Internal Revenue Code § 1014(a)).”
Let's not forget how the US just conveniently doesn't go after the wealthy for tax fraud, because it's too difficult given they can hire armies of CPAs and lawyers to defend themselves.
The US does go after the wealth for tax fraud. I think the bigger issue is that the wealth pre-emptively hire CPAs/lawyers to take maximum advantage of tax rules in a way that may not be prohibited, innovating faster than legislators can act.
IRS Audits Few Millionaires But Targeted Many Low-Income Families in FY 2022: https://trac.syr.edu/reports/706/
The IRS may be underfunded, but it's misleading to say the IRS does not go after the wealthy for tax fraud. The chart in that article shows $1M+ earners to have the highest audit rate, albeit some of it correspondence audit, and says 25% of audit man hours are spent on millionaires.
I'm neither an accountant nor a billionaire, but it seems like wealthy people will always have a certain amount of stock that is in a loss position. So if the "washed" stock appreciates and they want to sell it, there will be other stocks in a losing position that can wash the washer. You can therefore defer those taxes indefinitely.
This only makes sense to me if you have a very large, very diversified portfolio.
This only makes sense to me if you have a very large, very diversified portfolio.
> there will be other stocks in a losing position that can wash the washer.
That is equivalent to “your stock portfolio will never grow”.
> This only makes sense to me if you have a very large, very diversified portfolio.
You do not need to own much of the stocks to observe a fall relative to the purchase price in a stock you want to keep. The original “wash sale” prohibition just complicates tax planning - for everyone. Since it’s mathematically absurd, it’s prone to loopholes. But you need to spend time to find the loopholes, so wealthy people are (and will) suffer less.
“Wash sale” prohibition harms ordinary stock owners, like me, much more than it harms Steve Balmer.
That is equivalent to “your stock portfolio will never grow”.
> This only makes sense to me if you have a very large, very diversified portfolio.
You do not need to own much of the stocks to observe a fall relative to the purchase price in a stock you want to keep. The original “wash sale” prohibition just complicates tax planning - for everyone. Since it’s mathematically absurd, it’s prone to loopholes. But you need to spend time to find the loopholes, so wealthy people are (and will) suffer less.
“Wash sale” prohibition harms ordinary stock owners, like me, much more than it harms Steve Balmer.
> That is equivalent to “your stock portfolio will never grow”.
Realized gains are the only gains that are taxed. You aren't paying capital gains taxes on stocks when you aren't cashing them out.
So if a person has $100 million in stocks, some of which are up, and some of which are down. Decides to take out $1 million for a birthday party. And then wash trades a million dollar "paper loss" in their portfolio to cover for the $1 million they cashed out.
They'll still have practically the same portfolio, some of which has gained, and some of which has lost, minus the shares they sold to pay for the birthday party. If they invested well, it's possible that their overall portfolio has indeed gained. But thanks to the wash trade they don't have to pay any taxes on the $1 million in gains that they just cashed out.
> “Wash sale” prohibition harms ordinary stock owners, like me, much more than it harms Steve Balmer.
If you own it in a 401(k) or equivalent you can't claim capital gains losses as a deduction regardless (not until you start taking it out following retirement).
Realized gains are the only gains that are taxed. You aren't paying capital gains taxes on stocks when you aren't cashing them out.
So if a person has $100 million in stocks, some of which are up, and some of which are down. Decides to take out $1 million for a birthday party. And then wash trades a million dollar "paper loss" in their portfolio to cover for the $1 million they cashed out.
They'll still have practically the same portfolio, some of which has gained, and some of which has lost, minus the shares they sold to pay for the birthday party. If they invested well, it's possible that their overall portfolio has indeed gained. But thanks to the wash trade they don't have to pay any taxes on the $1 million in gains that they just cashed out.
> “Wash sale” prohibition harms ordinary stock owners, like me, much more than it harms Steve Balmer.
If you own it in a 401(k) or equivalent you can't claim capital gains losses as a deduction regardless (not until you start taking it out following retirement).
I own both 401k, which is mostly in mutual funds (and which are hurt every time you try to hurt Steve Balmers of this world) and also I manage some after-tax portfolio on my own (the experience I warmly recommend to anyone who is trying to understand the effects of proposed tax changes on ordinary investors).
> And then wash trades a million dollar "paper loss" in their portfolio to cover for the $1 million they cashed out.
This scenario that bothers you is pretty much unrealistic. It’s mathematically impossible if your portfolio grows to offset each cash out with a paper loss. Especially with securities you want to hold. Usually you just sell, register an offsetting loss and forget about the losing stock.
And in your calculations you forget the price I paid into the positions. So a year ago I had $200 and put them into stocks A and B, $100 each. Today I’ve sold A for $150, B for $50, got back $200 with zero profit per year. Zero profit - zero taxes, fair?
Now I’ve decided that $200 is a bit more than I need and decided to put $50 back in the market. What to buy? Oh, B looks good at $50, let’s put $50 back there. Suddenly, the tax collector says “this purchase (spending money on the stock) turns your $0 profit into $50 profit, taxes please”. How comes?
Note that my purchase of B back is not free. I will owe taxes if I sell it for more than $50 (previously - only if I sell it for more than $100). Also, for a year any profit on B will be taxed as an ordinary income, which can be much more than 18% on a long term sale.
TLDR. “Wash sale” rule creates more harm than good for an individual investor, and any harm it inflicts on Steve Balmers of the world is inflicted on 401k’s of the working people.
> And then wash trades a million dollar "paper loss" in their portfolio to cover for the $1 million they cashed out.
This scenario that bothers you is pretty much unrealistic. It’s mathematically impossible if your portfolio grows to offset each cash out with a paper loss. Especially with securities you want to hold. Usually you just sell, register an offsetting loss and forget about the losing stock.
And in your calculations you forget the price I paid into the positions. So a year ago I had $200 and put them into stocks A and B, $100 each. Today I’ve sold A for $150, B for $50, got back $200 with zero profit per year. Zero profit - zero taxes, fair?
Now I’ve decided that $200 is a bit more than I need and decided to put $50 back in the market. What to buy? Oh, B looks good at $50, let’s put $50 back there. Suddenly, the tax collector says “this purchase (spending money on the stock) turns your $0 profit into $50 profit, taxes please”. How comes?
Note that my purchase of B back is not free. I will owe taxes if I sell it for more than $50 (previously - only if I sell it for more than $100). Also, for a year any profit on B will be taxed as an ordinary income, which can be much more than 18% on a long term sale.
TLDR. “Wash sale” rule creates more harm than good for an individual investor, and any harm it inflicts on Steve Balmers of the world is inflicted on 401k’s of the working people.
How does discouraging wash trades hurt mutual funds? Selling a losing position seems like it would put downward pressure on that particular stock price. Turning around and buying an equivalent position seems like it would put upward pressure on that particular stock price. The only benefit to mutual funds seems to be that if you tax any money the Ballmer's of the world cash out, then you reduce the amount they can put in. Putting in more money would help the current mutual fund price, sure, but it would also make it more expensive compared to the underlying assets for future purchases of that fund.
> It’s mathematically impossible if your portfolio grows to offset each cash out with a paper loss
Unless you have a very, very large and distributed portfolio compared to the amount of cash you are taking out any given year. Such as for a billionaire who wants to bequeath their billions to a tax-free charitable trust after they die.
> And in your calculations you forget the price I paid into the positions.
I was making the math easy for rhetorical purposes.
> Suddenly, the tax collector says “this purchase (spending money on the stock) turns your $0 profit into $50 profit, taxes please”. How comes?
Because you haven't "realized" the loss in B. Instead you've made a market-manipulating double trade.
If I make a loss tomorrow I still have to pay my income taxes. Why should it be different for stock market purchases?
> It’s mathematically impossible if your portfolio grows to offset each cash out with a paper loss
Unless you have a very, very large and distributed portfolio compared to the amount of cash you are taking out any given year. Such as for a billionaire who wants to bequeath their billions to a tax-free charitable trust after they die.
> And in your calculations you forget the price I paid into the positions.
I was making the math easy for rhetorical purposes.
> Suddenly, the tax collector says “this purchase (spending money on the stock) turns your $0 profit into $50 profit, taxes please”. How comes?
Because you haven't "realized" the loss in B. Instead you've made a market-manipulating double trade.
If I make a loss tomorrow I still have to pay my income taxes. Why should it be different for stock market purchases?
Because they never realize capital gains. Instead they take a loan and use the stock as collateral to get
liquidity . They never pay back that loan, but just pay interest, which again lowers their taxable income.
They do pay capital gains, even if a loan differs it. If the individual dies before repaying the loan, their estate pays a tax rate much higher than capital gains as it cashes out assets to settle its debts.
I'm not sure how, but the "margin debt is an infinite free money hack" somehow caught on and won't go away. It's not a free money hack, it's debt that must be repaid with income. Which is always taxable.
I'm not sure how, but the "margin debt is an infinite free money hack" somehow caught on and won't go away. It's not a free money hack, it's debt that must be repaid with income. Which is always taxable.
Nope.. It IS a free money hack for the wealthy. The stepped up basis happens the day of your death. So when the estate sells assets to cover the liabilities, the profit of the sale will be calculated by subtracting the new stepped up basis from the sale price (effectively $0) so no tax.
Additionally, the wealthy will usually leave only enough assets in the estate to cover the liabilities plus maybe some more up to the estate tax threshold so it goes through tax free to the heirs. The rest will have been distributed through various other methods to avoid taxation.
Additionally, the wealthy will usually leave only enough assets in the estate to cover the liabilities plus maybe some more up to the estate tax threshold so it goes through tax free to the heirs. The rest will have been distributed through various other methods to avoid taxation.
I'm not sure how it works in the US , but there are plenty other jurisdictions were the estate is not required to settle debt but may just transfer it to the heir.
There is also jurisdictions were there is no inheritance tax, which would otherwise require to sell at least some of the estate.
There is also jurisdictions were there is no inheritance tax, which would otherwise require to sell at least some of the estate.
It's not that.
Let's take a concrete example given in the article. BHP group. You can buy BHP shares in 3 different primary listings. BHP.L[1] (on the LSE, listed in GBp), BHP[2] (on the NYSE, listed in USD) or BHP.AX[3] (listed in AUD on the ASX). These are fundamentally the exact same shares in the same company, but are listed in different countries. The only difference between them is the listing currency you pay to buy/receive on sale. When you receive the shares you actually get the same exact ISIN (I believe).
So say you hold some BHP and its price is underwater at the moment. You believe in the long-term prospects of the company and have made profits in general that you have to pay tax on. You could sell the BHP, realise the loss (offsetting these other taxes to an extent) and buy again. However that "bed and breakfasting" (as it used to be called in the UK) has been declared illegal. If you were to sell in the US and then immediately buy on any US market that would be illegal. But if you sell in the US and then buy in London or Sydney (in this example) that is allowed.
How the tax advantage works is you are literally taking an extra mark-to-market loss and offsetting that against other profits. Yes if you instead held and eventually made a profit you would pay less in that scenario, but in that scenario you are paying in future dollars whereas with the offsetting you are gaining today's dollars. Today's dollars are more value because of discounting.
[1] https://finance.yahoo.com/quote/BHP.L?p=BHP.L&.tsrc=fin-srch
[2] https://finance.yahoo.com/quote/BHP?p=BHP&.tsrc=fin-srch
[3] https://finance.yahoo.com/quote/BHP.AX?p=BHP.AX&.tsrc=fin-sr...
Let's take a concrete example given in the article. BHP group. You can buy BHP shares in 3 different primary listings. BHP.L[1] (on the LSE, listed in GBp), BHP[2] (on the NYSE, listed in USD) or BHP.AX[3] (listed in AUD on the ASX). These are fundamentally the exact same shares in the same company, but are listed in different countries. The only difference between them is the listing currency you pay to buy/receive on sale. When you receive the shares you actually get the same exact ISIN (I believe).
So say you hold some BHP and its price is underwater at the moment. You believe in the long-term prospects of the company and have made profits in general that you have to pay tax on. You could sell the BHP, realise the loss (offsetting these other taxes to an extent) and buy again. However that "bed and breakfasting" (as it used to be called in the UK) has been declared illegal. If you were to sell in the US and then immediately buy on any US market that would be illegal. But if you sell in the US and then buy in London or Sydney (in this example) that is allowed.
How the tax advantage works is you are literally taking an extra mark-to-market loss and offsetting that against other profits. Yes if you instead held and eventually made a profit you would pay less in that scenario, but in that scenario you are paying in future dollars whereas with the offsetting you are gaining today's dollars. Today's dollars are more value because of discounting.
[1] https://finance.yahoo.com/quote/BHP.L?p=BHP.L&.tsrc=fin-srch
[2] https://finance.yahoo.com/quote/BHP?p=BHP&.tsrc=fin-srch
[3] https://finance.yahoo.com/quote/BHP.AX?p=BHP.AX&.tsrc=fin-sr...
Quit taxing the ultra wealthy as if they're some regular joe pulling a yearly salary or hourly wages. Their wealth game is different, so tax them differently.
Exactly.
If someone joins a start-up and cashes out with $10M, tax it at 60%, not 20% long-term capital gains.
Nobody needs more than $4M.
If someone joins a start-up and cashes out with $10M, tax it at 60%, not 20% long-term capital gains.
Nobody needs more than $4M.
$4M at 3% annual interest is $120,000/yr. In some parts of the country (NYC, SF) that is barely enough (or even not enough) to retire on.
BS. I live in the SF bay area and we gross less than $100k/year supporting a two person household.
$120k/year would be a bit over a 33% raise.
Married filing jointly (MFJ) or Single (S) on the $120k/year in capital gains would be:
MFJ: 0% up to $83,350. 15% above that amount. For a total tax of $5497.50 in federal taxes.
S: 0% up to $41,675. 15% above that amount. For a total tax of $11748.75 in federal taxes.
The California tax rates for income or capital gains are:
MFJ: $3,623.42 plus 8% of the amount over $104,910. For a total of $4830.62 in state taxes.
S: $2,918.91 plus 9.3% of the amount over $66,295. For a total tax of $7913.48 in state taxes.
Net, after tax income is:
MFJ: $9139.32 per month
S: $8361.48 per month
These both compare quite favorably to the average ~$6,200 after-tax income my household lives on. And that's without subtracting the $650 additional taken out for the pension (because a person living on interest doesn't need to subtract money for retirement, as they are effectively retired!!). Or the extra $180 or so taken out for other post-tax payroll deductions.
$120k/year would be a bit over a 33% raise.
Married filing jointly (MFJ) or Single (S) on the $120k/year in capital gains would be:
MFJ: 0% up to $83,350. 15% above that amount. For a total tax of $5497.50 in federal taxes.
S: 0% up to $41,675. 15% above that amount. For a total tax of $11748.75 in federal taxes.
The California tax rates for income or capital gains are:
MFJ: $3,623.42 plus 8% of the amount over $104,910. For a total of $4830.62 in state taxes.
S: $2,918.91 plus 9.3% of the amount over $66,295. For a total tax of $7913.48 in state taxes.
Net, after tax income is:
MFJ: $9139.32 per month
S: $8361.48 per month
These both compare quite favorably to the average ~$6,200 after-tax income my household lives on. And that's without subtracting the $650 additional taken out for the pension (because a person living on interest doesn't need to subtract money for retirement, as they are effectively retired!!). Or the extra $180 or so taken out for other post-tax payroll deductions.
Nobody needs so much money they never have to work again. Great, you won the start-up lottery! You've got a nice nest egg, now go back to work.
Or, go and move to mid-west and retire. US tax payers don't need to subsidize your lifestyle so you can live in NYC or SF.
Or, go and move to mid-west and retire. US tax payers don't need to subsidize your lifestyle so you can live in NYC or SF.
Why?
Because the financial priority of the economic regulatory system (which includes taxes) should be the economy. And working people add to the economy much moreso than rich slackers.
Because the priority should be people who have nothing.
And when they complain it’s all “paper wealth”, offer to take that. Let them pay a wealth tax with stocks. Then set up a public trust to manage a huge fund that has a mandate to invest ethically and favor industries that are good for the advancement of everyone, not just the wealthy elite.
The only people I expect to manage wealth worse than greedy execs/capitalists is bureaucrats and politicians.
As much as I oppose the idea, if it must be done, the only way I can see the government not squandering and corrupting all the money is to just immediately distribute it amongst the populace.
As much as I oppose the idea, if it must be done, the only way I can see the government not squandering and corrupting all the money is to just immediately distribute it amongst the populace.
The arrow points the other way.
Government spending is a loan, which is repaid thru taxes.
Tax avoidance is the debtor defaulting on that loan. (Both morally and fiscally.)
Government spending is a loan, which is repaid thru taxes.
Tax avoidance is the debtor defaulting on that loan. (Both morally and fiscally.)
I have been talking of a Net Worth tax for some time now.
Start at a value that is truly eye-watering for your average citizen, one which the lower-99% will never reach in their lifetimes. Say, for argument, $10M.
Implement an algorithm that plots out a Sigmoid Curve - 0% taxation at $10M, and increasing slowly at the beginning. Once it gets close to the inflection point, it rises rapidly to over 80% taxation, at which point it then slows down again, reaching 100% taxation for everything above the maximum value.
Which would be set at something truly ridiculously high - say, $100M.
That way, we have a smooth curve that cannot be “gamed” anywhere as easily as abrupt taxation levels. And we use simpler, market-valued assets from anywhere in the world that focus on how the hyper-wealthy sock away their wealth.
As such, any sort of classic investment is most definitely on the table, especially if it is ever valued by an open market. Housing, land, gold, stocks, bonds, business partnerships, you name it. All on board for taxation.
The nice thing about Sigmoid curves in a taxation role is that they start off incredibly gentle - you will likely not may much tax at all until you hit $25M of net worth, because it’s paid progressively on any amount above $10M. But at the same time, you pay 100% taxation on any net worth above $100M.
It is truly a progressive tax, leaving plenty of room for the ambitious, but is punishingly draconian on the vampiristically greedy.
Start at a value that is truly eye-watering for your average citizen, one which the lower-99% will never reach in their lifetimes. Say, for argument, $10M.
Implement an algorithm that plots out a Sigmoid Curve - 0% taxation at $10M, and increasing slowly at the beginning. Once it gets close to the inflection point, it rises rapidly to over 80% taxation, at which point it then slows down again, reaching 100% taxation for everything above the maximum value.
Which would be set at something truly ridiculously high - say, $100M.
That way, we have a smooth curve that cannot be “gamed” anywhere as easily as abrupt taxation levels. And we use simpler, market-valued assets from anywhere in the world that focus on how the hyper-wealthy sock away their wealth.
As such, any sort of classic investment is most definitely on the table, especially if it is ever valued by an open market. Housing, land, gold, stocks, bonds, business partnerships, you name it. All on board for taxation.
The nice thing about Sigmoid curves in a taxation role is that they start off incredibly gentle - you will likely not may much tax at all until you hit $25M of net worth, because it’s paid progressively on any amount above $10M. But at the same time, you pay 100% taxation on any net worth above $100M.
It is truly a progressive tax, leaving plenty of room for the ambitious, but is punishingly draconian on the vampiristically greedy.
Your whole comment just shows how little you understand about the problem. The problem is not that governments do not know what a "Sigmoid Curve" is. The problem entirely lies in "Net Worth tax". How do you determine net worth? With all the different types of corporations out there, you just move your net worth into an entity that you do not "own". Just like how my work laptop is not mine. If your conclusion is to tax businesses on net worth, that would be easily skirted with international boundaries and drastically lower business creation.
> With all the different types of corporations out there, you just move your net worth into an entity that you do not "own". Just like how my work laptop is not mine.
This is the big problem with trying to tax the wealthy in America: There are just way too many ways to "not technically own" something, but still in reality be in complete control of it and benefit from it. Trusts, corporations, foundations: All these phony paper entities that you can "move" your stuff into in order to pretend to the government that it's not yours anymore, when it is in all reality totally controlled by you.
I worked for a founder once where basically everything he owned and benefitted from was owned by a "charitable foundation" or something. His homes, cars, boats, everything. He probably paid zero in taxes, whereas I, a chump, paid the normal rate. Total scam, but hey, that's what you get when the wealthy write the law.
This is the big problem with trying to tax the wealthy in America: There are just way too many ways to "not technically own" something, but still in reality be in complete control of it and benefit from it. Trusts, corporations, foundations: All these phony paper entities that you can "move" your stuff into in order to pretend to the government that it's not yours anymore, when it is in all reality totally controlled by you.
I worked for a founder once where basically everything he owned and benefitted from was owned by a "charitable foundation" or something. His homes, cars, boats, everything. He probably paid zero in taxes, whereas I, a chump, paid the normal rate. Total scam, but hey, that's what you get when the wealthy write the law.
> All these phony paper entities that you can "move" your stuff into in order to pretend to the government that it's not yours anymore
You make it sound like this was something invented by tax -dodging capitalists getting one over on the government. But in reality the only reason paper entities exist at all is because government wills it so.
You make it sound like this was something invented by tax -dodging capitalists getting one over on the government. But in reality the only reason paper entities exist at all is because government wills it so.
> because government wills it so.
And now you make it sound like tax-dodging capitalists have no influence over a government's will. Welcome to the world of Citizens United, lobbying and such.
And now you make it sound like tax-dodging capitalists have no influence over a government's will. Welcome to the world of Citizens United, lobbying and such.
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The problem with this is it basically just bans everyone from owning a company, and/or puts a limit on the growth of their company. Maybe you want that, but it's going to have weird implications around divesting wealth before the government can get to it and/or disincetivising companies to grow beyond a certain point.
The problem with those super high rates now is that the super wealthy will just move overseas and renounce their citizenship. So you have to get other countries on board, the super wealthy are far too mobile.
10 million dollars is not that much money.
> Both Shell and BHP offered two different versions of their common stock. For each company, the two stocks were legally distinct, but they performed very similarly because, after all, they were shares in the same company.
Sneaky snakes! So they are wash selling without really selling anything so they can harvest the maximum tax losses every year without actually making any sales. There are lies, dang lies, and tax accountancy...
Sneaky snakes! So they are wash selling without really selling anything so they can harvest the maximum tax losses every year without actually making any sales. There are lies, dang lies, and tax accountancy...
“Wash sale” prohibition is mathematically absurd. “Two different versions of a common stock” is just a mathematical proof of the absurdity.
Slightly different tangent but people do this with ETFs all the time. I built a tool that shows potential swaps to harvest losses for taxes but keep similar exposure. Checkout taxlossharvestingtool.com
If a multi-billionaire hates taxes so much, why not just stop making money? I don't understand why avarice is so important when you have more money than can be spent in two lifetimes. Taxes are a portion of income and generally are not more than annual income. As long as there is a net gain, even if it is smaller than it would be tax-free, why not be a good guy instead of an asshole? We really need to make it astoundingly unprofitable for billionaires to skirt taxes because its billionaires driving up everyone else's taxes. If cops can seize over 50K asset forfeitures every year from non-billionaires and non-millionaires and non hundred-thousandaires, then surely we can tolerate seizing nearly all of the merely the top 50 billionaires' wealth, and leave them with a token $200M each to scrape-by.
Please stop voting for candidates that are members of the party that's primary purpose is to prop up the uber rich and make them richer, faster, at the expense of everyone else. The 2nd Amendment isn't ever going anywhere, and you will never, never ever advance economically voting against your personal economic interests. If everyone voted only in their personal economic interests, employment would skyrocket, crime and poverty would plummet, and the economy would boom. The uber rich aren't stupid with their votes, 99.9% of the other members of their party are.
Please stop voting for candidates that are members of the party that's primary purpose is to prop up the uber rich and make them richer, faster, at the expense of everyone else. The 2nd Amendment isn't ever going anywhere, and you will never, never ever advance economically voting against your personal economic interests. If everyone voted only in their personal economic interests, employment would skyrocket, crime and poverty would plummet, and the economy would boom. The uber rich aren't stupid with their votes, 99.9% of the other members of their party are.
The same kinds of people that aren't satisfied with making $5m, and want $50m, or $500m, or $5bn, can't psychologically fathom letting go of a single penny to anyone else, whether it's their competitors or the government.
That's the problem. To many of them it's a score.
That's the problem. To many of them it's a score.
I have a “living experience” in a country where (potential) billionaires were not allowed to make money. Believe me, you do not want to be there.
Not what I suggested, only that once you have billions of dollars, there are better things to do with one's time than obsesses about relatively petty amounts. One can only live for so long and only spend so much, so it simply isn't rational to waste any time whatsoever attempting to increase wealth at such a minuscule amount to what you already have. $132M represents 0.2% of Balmer's $58.3B, and he's that much closer to death for having wasted any time whatsoever for such an absurdly small gain, relatively speaking.
> In November 1920, a reader of The Wall Street Journal identified as R.H.T. wrote in with a question.
> “I do not want to sell these stocks at the present market,” wrote R.H.T. “Would it be legal for me to sell these stocks and deduct the loss from this year’s income, even though I bought them in again the same day?” Yes, the Journal responded, the transaction was permitted under the law.
A long history of attempts to patch this "loophole" follows, but the really curious thing is how this is advantageous in the first place. As far as I understand it's because the tax system was developed to tax wage income, and a system to tax investment income is kind of bolted on. With wage income it makes sense to tax it yearly and there's no concept of wage losses.
> “I do not want to sell these stocks at the present market,” wrote R.H.T. “Would it be legal for me to sell these stocks and deduct the loss from this year’s income, even though I bought them in again the same day?” Yes, the Journal responded, the transaction was permitted under the law.
A long history of attempts to patch this "loophole" follows, but the really curious thing is how this is advantageous in the first place. As far as I understand it's because the tax system was developed to tax wage income, and a system to tax investment income is kind of bolted on. With wage income it makes sense to tax it yearly and there's no concept of wage losses.
Why not tax, at least for publicly traded stocks, the unrealized capital gains? (taking e.g. the last price of the year as basis)
In addition to the problem mentioned in the OP, this would also solve taxation for buybacks.
In addition to the problem mentioned in the OP, this would also solve taxation for buybacks.
In addition to being a highly volatile source of revenue to the government, you would have to give tax breaks for unrealized capital losses out of fairness; which would introduce a ton of complexity.
Yes, tax would be paid on the net capital gain for the year. If negative, it can be carried forward to the next year, without limitations.
I don’t know if offsetting non-capital income with capital losses should be allowed. My intuition says no, but who knows.
I don’t know if offsetting non-capital income with capital losses should be allowed. My intuition says no, but who knows.
the US government already effectively does this to foreign resident citizens who buy PFICs (and why us citizens are strongly encouraged not to buy PFICs).
the reason its problematic is that just because a persons assets have risen, doesnt mean they want to sell, and if they dont sell, it means they need the liquid assets to cover said tax bill. a tax of this nature forces people to sell assets which is problematic. Its not problematic to say you sold X assets at profit Y, its your responsibility to retain percentage Z of that to pay the taxes.
the reason its problematic is that just because a persons assets have risen, doesnt mean they want to sell, and if they dont sell, it means they need the liquid assets to cover said tax bill. a tax of this nature forces people to sell assets which is problematic. Its not problematic to say you sold X assets at profit Y, its your responsibility to retain percentage Z of that to pay the taxes.
That’s why I suggested public companies only. Their stocks can be easily sold at any time.
$100 million tax bill -> move $100 million into Donor Advised Fund -> open family foundation and hire yourself / kids / friends at ~$500k per year leadership roles -> DAF moves $100 million into the family foundation -> money back to self, host galas / high society events, enjoy life
DAF and "family foundation" are two alternate things. The latter is much more lawyer-intensive.
The DAF can be done quickly for the tax writeoff. Then you follow up with family foundation set up properly
Yes, but if you have a $100m tax bill, you would need to donate more than that to offset the taxes. Assuming a 33% tax rate, you would need to put $300m into a foundation to zero out $100m in taxes.
Is this legal?
Yes
If you have to ask, you can’t afford it. Lol.
I definitely can’t afford that!
anyone who owns stocks should consider using a DAF. The only people who shouldn't consider using a DAF are the people who either dont own stocks or never give charity.
The title is a lie.
They just defer taxation to a later year.
What tax harvesting moves like this get you is better compounding, and the result is, you pay more taxes (on more gains) later.
They just defer taxation to a later year.
What tax harvesting moves like this get you is better compounding, and the result is, you pay more taxes (on more gains) later.
Not if you keep doing it until the day you die.
Good for them. The only thing that upsets me is that this technique is not available for everyone.
Watching the us government fire a $150k missile from a $170m fighter that costs $25k/hour to fly at a $250 balloon ticks me off. That’s my money. It was taken from me unwillingly and transferred to to some elite 1% senator’s golf Buddy.
Taxes are stupid and we need to move past them if we’re ever to advance as a civilization.
Watching the us government fire a $150k missile from a $170m fighter that costs $25k/hour to fly at a $250 balloon ticks me off. That’s my money. It was taken from me unwillingly and transferred to to some elite 1% senator’s golf Buddy.
Taxes are stupid and we need to move past them if we’re ever to advance as a civilization.
This technique is available for everyone.
Only technically. The overhead to manage this rarely works out for the less than wealthy. Not to mention most non-wealthy people make most of their income as earned income.
I'm not sure what you mean by "overhead", but direct indexing has been commodified for the masses for a while. See Wealthfront for example. Even Vanguard is pushing into it soon:
https://www.etf.com/sections/features-and-news/vanguard-goin...
Now that said, I agree the benefits of direct indexing for the non-wealthy is vastly overstated and probably a mistake for most.
https://www.etf.com/sections/features-and-news/vanguard-goin...
Now that said, I agree the benefits of direct indexing for the non-wealthy is vastly overstated and probably a mistake for most.
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I do loss harvesting every year in a simple online brokerage account. There is basically no "overhead", especially since many brokerages over extremely low or 0 trading fees these days. This isn't difficult.
And you probably save a negligible amount overall for your trouble.
I’m missing the key part of this, how would things get paid for?
And how does defence work? There would be no fiat money anymore as it’s basis is gone so guess it is Gold or Bitcoin.
You would need to defend yourself so you need guns. But that would be useless against groups of people with guns so people will form groups that defend themselves. Eventuality some of those people will specialise and some people in the group pay others to defend the group in a form of a kind of “tithe” or regular payment to the common good.
You would need to defend yourself so you need guns. But that would be useless against groups of people with guns so people will form groups that defend themselves. Eventuality some of those people will specialise and some people in the group pay others to defend the group in a form of a kind of “tithe” or regular payment to the common good.
Couldn't the government just print money, which devalues the currency, and is thus essentially a flat rate wealth tax?
It would be a flat-rate wealth tax only on dollar-denominated assets, which would exclude among other things stocks, art, yachts, country estates... all of which rich people like to own.
Voluntary transactions and/or illegitimate violence.
Maybe everybody can start paying for their things themselves instead of forcing others?
Have you an example of a system like this working somewhere?
Of course not, because that wouldn't be a system.
Paying exorbitant fees to market makers who get to set the price to whatever they want directly (or invest billions in PR to control the market indirectly) is so much better than paying taxes to an entity you have some democratic control over!
You are among the very few who broke free. But you cannot help those who don't want to be helped, they belong to the system.
I know plenty of middle-class people using this technique as well, it's commonly called "tax loss harvesting".
Close the "loophole" (not a loophole, it's just following the law as written) and it'll impact way more than just the wealthy.
Close the "loophole" (not a loophole, it's just following the law as written) and it'll impact way more than just the wealthy.
I would wager it would affect middle class significantly less as a percentage of their total net worth than the wealthy. Considering that most middle class wealth is in their primary residence and not the stock market. I'm sure closing the loophole could be easily offset for then by slightly lowering income tax on the lower brackets.
The article's specifically talking about switching between nearly identical securities. Tax loss harvesting is more general.
Its done the same way.
You swap one security for another, almost identical one and take the capital loss.
You swap one security for another, almost identical one and take the capital loss.
Right; I'm saying, many people tax loss harvest, most don't swap back in the same day to an alternate share class on the same company.
In australia they could say this makes you a professional trader and now it is all subject to income tax and more
scrutiny.
TLDR - by using tax loss harvesting . At the end of the year, sell your stocks which are down and then buy them back. Then you can use the losses to offset the gains. Although this is also available to masses .
> Although this is also available to masses .
Not in any meaningful sense. Only the ultra-wealthy can wipe out the lion's share of their tax bill through this loophole. From the article:
> Someone like Ballmer can easily deploy $100 million in losses to cancel out a $100 million gain from selling some of his vast Microsoft holdings. It’s a very different story when it comes to wages and other forms of income, of which only $3,000 can be offset. On average, only the top 0.001% of taxpayers made a majority of their income through investment gains in 2018, according to public IRS data.
Not in any meaningful sense. Only the ultra-wealthy can wipe out the lion's share of their tax bill through this loophole. From the article:
> Someone like Ballmer can easily deploy $100 million in losses to cancel out a $100 million gain from selling some of his vast Microsoft holdings. It’s a very different story when it comes to wages and other forms of income, of which only $3,000 can be offset. On average, only the top 0.001% of taxpayers made a majority of their income through investment gains in 2018, according to public IRS data.
If he's eating $100 million in losses in one investment and gaining $100 million in another, he's not any richer at the end of the year. I'm not sure what the outrage is.
But like you say you can only deduct $3000 of capital losses per year. Completely and entirely immaterial to a billionaire like Ballmer, but very valuable to someone in the middle class or lower.
But like you say you can only deduct $3000 of capital losses per year. Completely and entirely immaterial to a billionaire like Ballmer, but very valuable to someone in the middle class or lower.
The whole point of wash sales is that he's not eating $100M in losses. He's moving money between two nearly-identical stocks, which happens to look like a loss on paper at the moment that the deal occurs.
And for somebody to whom $3k is a significant amount of money, fucking around on the stock market to engineer a $3k on-paper loss is quite out of reach.
And for somebody to whom $3k is a significant amount of money, fucking around on the stock market to engineer a $3k on-paper loss is quite out of reach.
But the maximum benefit of a wash sale is only $3000 in deductions, which he is entitled to, but does not really effect his financial situation in any way.
Not on capital gains, no:
https://turbotax.intuit.com/tax-tips/investments-and-taxes/g...
When used to offset other kinds of income, the $3k limit applies.
https://turbotax.intuit.com/tax-tips/investments-and-taxes/c...
https://turbotax.intuit.com/tax-tips/investments-and-taxes/g...
When used to offset other kinds of income, the $3k limit applies.
https://turbotax.intuit.com/tax-tips/investments-and-taxes/c...
> you can only deduct $3000 of capital losses per year
Edit: I thought that limit is just for your ordinary income but there seems to be disagreement on this?
Edit: I thought that limit is just for your ordinary income but there seems to be disagreement on this?
You are correct and missedthecue is incorrect.
IRS laws say you can deduct $3000 ordinary income (i.e. income earned by working, so doesn't include capital gains) per year and deduct without limit against capital gains. Should your capital losses exceed your capital gains that year, you can carryforward the rest of the capital losses without limit onto the next year 2023, 2024, etc.
The whole point of the article is that "tax loss harvesting" beneficial to Steve Ballmer and the other billionaires mentioned in the article, because they have $Bs in capital gains to begin with (Steve Ballmer had highly appreciated MSFT stock as mentioned in the article). An average Joe like you and me even if we have that much capital losses would find it difficult to find the capital gains to deduct against, so we're typically limited to only $3000 per year deducting against ordinary income (compare against no limit for capital gains), which is much less useful tax shield compared to someone like Steve Ballmer who gets most of his income from capital gains, and who therefore can use his massive cap losses to shield against taxation much more effectively. This is the part that makes "Although this is also available to masses" somewhat moot. Even though it's "technically" possible, the masses don't have the massive capital gains to actually deduct against, so they don't benefit from this to nearly the same magnitude as someone who draws most of their income from capital appreciation.
Therefore, one could argue that this section of the tax code is "unfair" in year 2023. The article makes the case that wash sale rule was effective in the 1920s, but that in the 100 years that have passed, technology has made evading the wash sale rule trivial (especially for billionaires), so the rule as drafted in the 1900s is no longer effective at preventing what it intended.
Source: https://www.irs.gov/taxtopics/tc409
IRS laws say you can deduct $3000 ordinary income (i.e. income earned by working, so doesn't include capital gains) per year and deduct without limit against capital gains. Should your capital losses exceed your capital gains that year, you can carryforward the rest of the capital losses without limit onto the next year 2023, 2024, etc.
The whole point of the article is that "tax loss harvesting" beneficial to Steve Ballmer and the other billionaires mentioned in the article, because they have $Bs in capital gains to begin with (Steve Ballmer had highly appreciated MSFT stock as mentioned in the article). An average Joe like you and me even if we have that much capital losses would find it difficult to find the capital gains to deduct against, so we're typically limited to only $3000 per year deducting against ordinary income (compare against no limit for capital gains), which is much less useful tax shield compared to someone like Steve Ballmer who gets most of his income from capital gains, and who therefore can use his massive cap losses to shield against taxation much more effectively. This is the part that makes "Although this is also available to masses" somewhat moot. Even though it's "technically" possible, the masses don't have the massive capital gains to actually deduct against, so they don't benefit from this to nearly the same magnitude as someone who draws most of their income from capital appreciation.
Therefore, one could argue that this section of the tax code is "unfair" in year 2023. The article makes the case that wash sale rule was effective in the 1920s, but that in the 100 years that have passed, technology has made evading the wash sale rule trivial (especially for billionaires), so the rule as drafted in the 1900s is no longer effective at preventing what it intended.
Source: https://www.irs.gov/taxtopics/tc409
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Absolutely the masses can use it.
Last year was a great time to do it. SP500 was down, but many tech stocks weren't (yet).
Sell your Vanguard ETF, use the loss to offset the tech stock you sold with huge gains. Buy back another ETF that is highly correlated with the SP500.
Net capital gains = $0 and you still hold the same SP500 position as before.
Last year was a great time to do it. SP500 was down, but many tech stocks weren't (yet).
Sell your Vanguard ETF, use the loss to offset the tech stock you sold with huge gains. Buy back another ETF that is highly correlated with the SP500.
Net capital gains = $0 and you still hold the same SP500 position as before.
> "Absolutely the masses can use it."
It looks like the majority of people who own stock own it in things like retirement accounts[1, Table 3.]. Tax-deferred retirement accounts apparently can't use this trick[2].
1 - https://wallethacks.com/stock-ownership-in-america/
2 - https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
It looks like the majority of people who own stock own it in things like retirement accounts[1, Table 3.]. Tax-deferred retirement accounts apparently can't use this trick[2].
1 - https://wallethacks.com/stock-ownership-in-america/
2 - https://www.irs.gov/newsroom/what-if-my-401k-drops-in-value
Betterment lets you do it through their pseudo index fund.
You don't buy back the same stocks, you buy back similar stocks or ETFs.
you might buy back the same stocks, to game the longterm vs shortterm capital gains rules, no?
In some jurisdictions (such as Australia), this is called a wash sale, and is illegal.
The entire article is about wash sales, basically describing ways to circumvent the rules.
The IRS will also reject the reported loss if it qualifies as a wash sale.
> You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
https://www.irs.gov/pub/irs-pdf/p550.pdf
> You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
https://www.irs.gov/pub/irs-pdf/p550.pdf
Tax capital gains the same as income. Tax on unrealised gains (minus losses). Tax quarterly. Then this problem goes away.
But the rich wont vote for that!
But the rich wont vote for that!
Taxing unrealized gains is unworkable.
Changing the definition of what constitutes "realizing" a gain is workable, however. For example, if you put $50M in stock as collateral against a loan to buy your yacht, you are very explicitly "realizing" the value of that, both by getting multiple parties to agree on its value and put it on record in a federally-regulated transaction (realizing in the sense of "making the value real"), and by actually getting a corresponding wad of cash out of it (realizing in the sense of "reaping the benefit"). Using the fact that it hasn't actually been "sold" as the basis of a claim that its value is "unrealized" should be recognized as the tax dodge it is.
How does the loan hack work here? I feel like there's a step missing in the explanations I always read. You take a loan to buy your yacht with your stocks at collateral, then somehow (?) get untaxed cash to pay the loan back?
I think that's really all there is to it. They do have to pay the interest, and the cash they use to service the loan isn't untaxed, but they were paying that tax anyway. It does assume that the have the cashflow to service the loan completely independent of this deal, but the point is it means they get the best of all worlds: they get immediate access to the cash value of the stock, they don't pay taxes on that value, and they continue gaining as the stock increases even more in value. But you're right, they aren't really avoiding the tax on the stock gains, they're just deferring it way down the road, which is particularly beneficial when your heirs get to step up the basis of what they inherit.
Yeah so the ultimate source of the problem seems to be the basis step up, not any of the rest. So why isn't that identified as the source of the problem?
I suppose one thing nobody has mentioned is that deferral can also help you wait for a year when the rate of the top tax bracket is lowered? Maybe that's a significant component too?
I suppose one thing nobody has mentioned is that deferral can also help you wait for a year when the rate of the top tax bracket is lowered? Maybe that's a significant component too?
I think it's possible that eliminating the basis step up could change a lot of incentives to do this sort of maneuver, yes.
For folks this wealthy, I doubt the difference in tax brackets make much of a difference. What's classified as income is probably such a small portion of what they get taxed on that it just doesn't matter.
For folks this wealthy, I doubt the difference in tax brackets make much of a difference. What's classified as income is probably such a small portion of what they get taxed on that it just doesn't matter.
Sorry, to clarify, I meant the rate of the top tax bracket. Not the threshold. I edited the comment to clarify.
Still, if you make $10MM/year in cap gains and what qualifies as "income" is in the hundreds of thousands, do you care what the top rate is?
Depends what kind of capital gains you have. I have no idea what they have, but short-term capital gains are treated as ordinary income.
And obviously the logic would be the same for if/when they change the long-term capital gains tax rates.
And obviously the logic would be the same for if/when they change the long-term capital gains tax rates.
As a pleb my guess would be to just get new loans, bigger and bigger, that pay off the previous loan debt plus what you need next.
Once you die the estate settles the loans via the creditors just grabbing the collateral. I think it would never get taxed then no?
Once you die the estate settles the loans via the creditors just grabbing the collateral. I think it would never get taxed then no?
So, what I'm trying to get someone here to confirm (with no success so far) is that none of this would be a issue to speak of without inheritance cost basis step-up? Am I correct to understand that that's the real issue, and wash sale rules etc. are just distractions?
You never pay them back. Just pay interest which you also borrow. This might stop being as attractive if interest rates are high and inflation is low though.
Hm I don't quite believe this explains the story. How much does debt does someone like Ballmer carry to their death, and how much do they pay in interest?
A HELOC on your home is a tax dodge? That will be news to millions of middle class people.
I suspect you already know that these millions of middle class people almost certainly would not have been paying taxes on that rise in the value of their primary residence, so no. A HELOC is not a tax dodge.
Politically maybe but not practically.
What are property taxes? Effectively this but for a specific asset.
Granted they are not based in the rise in value. But the idea of paying tax for holding something is not new.
What are property taxes? Effectively this but for a specific asset.
Granted they are not based in the rise in value. But the idea of paying tax for holding something is not new.
Property taxes are consumption taxes.
Taxing stock ownership is a tax on investing.
Taxing stock ownership is a tax on investing.
I am talking about taxes paid yearly per property by the owner even it they don’t occupy the property
They are still consuming those property-hours.
The wealthy can skirt this by hiring tax attorney to gift their assets to some kind of charitable trust and get annuity payments to live off of and pay minimal to no tax. While the rest of us will actually pay the tax... that is if you find any incentive to even participate in such market. All of these boneheaded ideas only end up taxing normal people in the end. The ultra wealthy have other plans.
> But the rich wont vote for that!
The middle class wouldn't vote for that either.
The middle class wouldn't vote for that either.
Wash selling, add this strategy is known, is not actually legal in the U.S.
Years ago at a firm, I had a client they to convince us to do this for them. The partner told them they weren't paying us enough for him to risk the prison time.
And yes, if you get caught, you still pay penalties, and interest, and if the amount is large enough you can look forward to a taxpayer paid vacation to a minimum security federal penitentiary.
Years ago at a firm, I had a client they to convince us to do this for them. The partner told them they weren't paying us enough for him to risk the prison time.
And yes, if you get caught, you still pay penalties, and interest, and if the amount is large enough you can look forward to a taxpayer paid vacation to a minimum security federal penitentiary.
You should read the article.
I did read the article.
The entire article is about wash trading.
The thing about tax is that "strategies" like this which are clearly contrary to the intent of the law but which technically fall within the letter of the regulations can be made explicitly illegal after the fact, so the lack of prosecutions to date is not an indicator of their illegality. See the Bermuda loss harvesting scandal from the early 2010s.
Goldman's partners are simply banking on being able to place enough former employees in the regulatory agencies to get away with it this time. It didn't work for the Bermudan loss harvesting schemes and it probably won't work this time.
The entire article is about wash trading.
The thing about tax is that "strategies" like this which are clearly contrary to the intent of the law but which technically fall within the letter of the regulations can be made explicitly illegal after the fact, so the lack of prosecutions to date is not an indicator of their illegality. See the Bermuda loss harvesting scandal from the early 2010s.
Goldman's partners are simply banking on being able to place enough former employees in the regulatory agencies to get away with it this time. It didn't work for the Bermudan loss harvesting schemes and it probably won't work this time.
The whole point, though, is that tax-loss harvesting is perfectly legal, so why is it fair to move the goalposts as to what counts as a wash sale? As the article states, "But well-tuned software could easily find the right stocks to keep the accounts tracking the market." So the law says you can't sell A and buy A back immediately and count it as a loss, but it says nothing against selling A and buying back B that happens to be strongly correlated with A. I'd argue that isn't even against the intent of the law (or at the very least this law is so poorly thought through that its intent is ambiguous).
Update/summary for those reading: The answer seems to be (if I understand the comments below correctly) that inherited assets' cost bases magically get stepped up to their fair market value without tax consequences, which would explain why kicking the can down the road is beneficial, as well as one reason why generational wealth is such an incredibly impactful loophole.