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10-03-2012, 10:10 AM #1
Capital Gains Taxes
One of the many false talking points of the Obama administration is that a rich man like Warren Buffett should not be paying a lower tax rate than his secretary. But anyone whose earnings come from capital gains usually...
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10-03-2012, 10:35 AM #2
How is capital gains different?
You didn't work for it.
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10-03-2012, 11:10 AM #3
Categorically false. You think people who do all of the due diligence and take all of the the risk of investing in capital assets aren't working for it?
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10-03-2012, 11:33 AM #4
I think sitting and reading is much easier than, say, logging.
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10-03-2012, 11:39 AM #5
Cap gains are so fungible though. Part of my job is minimizing the tax consequence on our clients. Say client x has 20 stock positions. I decide to sell a position that has a $25K gain (pat on the back for making a good investment!). But oh no! I have to pay a 15% tax on that $25K gain! Not so fast. Maybe I go back to the portfolio and see that I have another position that has a $25K loss. I sell that and POOF! No more tax consequence. Loss harvesting is an extremely common practice, as you know. Plus, cost basis can even be disingenuous at times. Example:
Let's say I have $100,000. I put that $100,000 into an intermediate-term bond fund that pays a 4% dividend every year. Rather than reinvesting, I simply take that 4% dividend ($4K) in cash rather than reinvesting it. If I hold that for 10 years, the NAV of that bond fund could actually go down (let's say I bought the bond fund at $10 a share, and it's now at $9.90 a share). So my cost basis will be $100,000, but my current position in the bond fund is $99,000. So technically, if I were to sell that fund, I would show a loss of $1,000. But really, I made almost $40K on that particular investment.
Plus, when you consider that you can carry your losses forward (We have tons of clients who are still carrying forward losses from 2008), it makes it somewhat easy to avoid or minimize capital gains.
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10-03-2012, 11:48 AM #6
Which brings up another point. Most people don't sit there and do everything themselves. People get hired to do it for them. I just don't understand why it's any different than regular income. Regular income is guaranteed? Really? So the company I work for can never go out of business or fire me or lay me off? Because that's what "guaranteed" would mean to me.
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10-03-2012, 12:06 PM #7
I understand all of that, but the tax consequences are still following the economic realities. In the first example, you have a real gain of $25K offset by a real loss of $25K. In the second, you may have a $1,000 capital loss on the fund, but you are still paying dividend tax on the $40K in gain.
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10-03-2012, 12:30 PM #8
Yes, but that dividend tax could be lower than the capital gains tax if it's a qualified dividend.
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10-03-2012, 12:37 PM #9
My point is income should be income.
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10-03-2012, 02:46 PM #10
Those items have always been given preferential tax treatment to encourage investment.
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