What could you do in this case?

[Animorph]

Given that inflation averages around 3% long-term I think we already have a 3% wealth tax, with no exemptions.

 

[Mulligan]

Oh that Professor Ronald McKnut is such a genius:


I suggest a different taxation scheme - Implement a 99% income tax on the Professor's salary and the big fat monthly pension amount he will probably get when he retires. And a 99% tax on the cost of all insurance provided to him at no or reduced cost. I'm looking out for him, it will be for his own good. If the people who support foundations reduce giving due to his "idea", then there will be less research grant money coming the way of academia. This will have a negative effect on many in the university world. Then his fellow professors will get angry and beat the snot out of him.

The prospect of pain was always a good motivator for me to change my opinion or behaviors

 

[Hamlet]

Why should the great-great-great grandchildren of Sam Walton get a tax-free lifestyle while everyone who works for a living has to pay the taxes neccessary to run our society?

I think an asset-based taxation scheme is a terrible idea, but I see no reason to exempt investment income from taxation. I would like to see all income of any source treated as much the same as possible. Obviously, there are some issue with capital gains and inflation, and the double taxation of dividends from corporations that are paying income tax (although given the current tax avoidance strategies that companies are using, this is well on its way to becoming a non-issue).

The progressive nature of our federal income tax is the only thing balancing out the regressive nature of all of the other taxes at the local, state, and federal levels. I am completely opposed to removing it.

Do you really think that investing is "riskier" than the income people make from working in this day and age?

I feel alot more confident in the money I have invested than I do in any current employment situation.

THe media does not do a good job explaining the details when they come out and say "such and such" is only paying 15%. The devil is in the details. A stock option is not cash. It is an equity ownership of stock in a company to be exercised whenever. I do not view this any differently than one of us who owns a home, second home or rental property and who only has to pay 15% cap gain when we sell that home if there is positive equity against cost basis. Technically it is not "income", not the way the tax code has been implemented since before I can remember. The person receiving stock options or the person wanting to sell a home....took a risk that those receiving normal income from employment do not take. Just a minor point for those who think it applies. That stock option could be worth less in 2 years...and we all know what housing has done. Equity ownership is not the same as employment income. Period.
The media and the "powers that be" are only telling half the story in an effort to incite the middle and lower income brackets. IMHO. Why should the person who pays 15% on cap gains and dividends be additionally penalized because they made a wise choice, wise investment..etc. Whether it be a stock option or someone who buys a rental property, it certainly helped the economy. Instead of a company paying a bonus of "cash" taking the money out of the company perhaps hurting the company's cash balance position, a stock option was granted. Someone who buys a rental property certainly helped the economy...the real estate agent got a piece, the mortgage loan company got a piece, money flows to the utility company, the TV. service provider, the maintenance people..etc...etc..
When one only looks at one piece...they can make the story "sound" however they want. Just like the politicians and the media.
And if the tax policy above was ever implemented, I predict most would stop buying assets...such as a house. Why risk...having more than 3 million in 30 years. Because one wouldn't know what that house might be worth in 30 years.

 

[M Paquette]

Don't some European countries have a similar wealth tax?

Yes, but at a considerably lower rate. 3% annually off of everything in a portfolio over 3 million, of all assets? (including real estate?) And I just bet that 3 million isn't inflation indexed.

The wealth tax in France on the very highest bracket (over roughly twenty million dollars) is 1.8%, and in Switzerland 1.5%. Norway tops out at 1.1% local+national, and India at 1%. They're not so foolish as to kill the good laying those golden eggs.

Investor visas for everyone. The gummint will still get its exit tax cut, of course, so FIRE planning will have to base the safe withdrawal rate on whats left after exit taxes.

 

[Finance Dave]

Take the amount >$3M and buy an annuity that makes periodic payments - problem solved (as long as the cost of annuitizing is less than the tax).

+1...find ways to not show the "wealth" on your balance sheet. They don't meantion how they'll measure the net worth...but you could buy cars, businesses, farms, rentals, annuities, etc.

Another trick would be to pre-pay as many things as you can:
1) pre-pay your funeral
2) Stock up on non-fungible items
3) Pay for a 5-year service contract on your furnace and air conditioner
4) Pay for lifetime subscriptions on your magazines and newspapers
5) Buy enough clothes for a few years (socks don't go out of style )
6) Pre-pay for 5 carpet cleanings...one per year for the next 5 years
7) Rather than give x% to your church each week/month, donate one large amount as a sort of trust that will take the place of future contributions for x years

and so on...

 

[Texas Proud]

THe media does not do a good job explaining the details when they come out and say "such and such" is only paying 15%. The devil is in the details. A stock option is not cash. It is an equity ownership of stock in a company to be exercised whenever. I do not view this any differently than one of us who owns a home, second home or rental property and who only has to pay 15% cap gain when we sell that home if there is positive equity against cost basis. Technically it is not "income", not the way the tax code has been implemented since before I can remember. The person receiving stock options or the person wanting to sell a home....took a risk that those receiving normal income from employment do not take. Just a minor point for those who think it applies. That stock option could be worth less in 2 years...and we all know what housing has done. Equity ownership is not the same as employment income. Period.
The media and the "powers that be" are only telling half the story in an effort to incite the middle and lower income brackets. IMHO. Why should the person who pays 15% on cap gains and dividends be additionally penalized because they made a wise choice, wise investment..etc. Whether it be a stock option or someone who buys a rental property, it certainly helped the economy. Instead of a company paying a bonus of "cash" taking the money out of the company perhaps hurting the company's cash balance position, a stock option was granted. Someone who buys a rental property certainly helped the economy...the real estate agent got a piece, the mortgage loan company got a piece, money flows to the utility company, the TV. service provider, the maintenance people..etc...etc..
When one only looks at one piece...they can make the story "sound" however they want. Just like the politicians and the media.
And if the tax policy above was ever implemented, I predict most would stop buying assets...such as a house. Why risk...having more than 3 million in 30 years. Because one wouldn't know what that house might be worth in 30 years.

Just want to point out that the big guys at the top are not getting stock options, but stock grants... look at the new CEO at Apple.. IIRC, $366 mill worth...

Also, a gain on a stock option is considered ordinary income... that is IF you get a gain... I have some options that expire next week and I will not get a cent... but also did not pay any taxes....

 

[Texas Proud]

+1...find ways to not show the "wealth" on your balance sheet. They don't meantion how they'll measure the net worth...but you could buy cars, businesses, farms, rentals, annuities, etc.

Another trick would be to pre-pay as many things as you can:
1) pre-pay your funeral
2) Stock up on non-fungible items
3) Pay for a 5-year service contract on your furnace and air conditioner
4) Pay for lifetime subscriptions on your magazines and newspapers
5) Buy enough clothes for a few years (socks don't go out of style )
6) Pre-pay for 5 carpet cleanings...one per year for the next 5 years
7) Rather than give x% to your church each week/month, donate one large amount as a sort of trust that will take the place of future contributions for x years

and so on...

But a number of the ones you mentioned have value...

Pre-paid funeral service is worth something...
Non-fungible items have value
Other pre-paids etc.

Now, the church contribution looks like it would work...


As for how will they know.... well, they would make you disclose what you own and have a hefty penalty if you did not...


BUT, isn't it illegal for the US to have this kind of tax I think they need an amendment to get it done and I do not think the voters would let it get through... kind of like the estate tax... everybody hopes to have enough money someday to be there, so they don't want it...

 

[REattempt]

to quote another poster, +1 here. I'm not militant about hitting those on the board that have LBYM and saved to retire, but how about the guy that gets restricted stock grants of millions and then only pays 15% on the millions he/she makes when exercising them? Why and I paying 28% when the CEO pays only 15% or less?

Over the years I've done some tax prep work for soldiers and others for free. Most of these don't pay much or any income tax and we know Buffett pays about 15%. Flat 25% makes sense to me.

Wow!

There may be some of [-]us [/-]those types on this board . Many of [-]us[/-] them worked multiple years to earn them. [-] We [/-]They were not CEOs nor the owners of the businesses. [-]We [/-]They were WORKERS and [-]we [/-]they put [-]our [/-]their pay at risk to earn a return. [-] We [/-]they just may have been lucky enough to work for a business owner that was willing to share the results of [-]our [/-]their work with [-]us [/-]them.

Working 20+ hour days, long weekends, taking phone calls from clients during family time and on and on...[-]I [/-]they EARNED them AND LBYM to make FIRE possible...

The Guv'ment made the rules on the tax code, not [-]me [/-]them!

Not everyone that benefits is a CEO or business owner.....

 

[RetireBy90]

Wow!

There may be some of [-]us [/-]those types on this board . Many of [-]us[/-] them worked multiple years to earn them. [-] We [/-]They were not CEOs nor the owners of the businesses. [-]We [/-]They were WORKERS and [-]we [/-]they put [-]our [/-]their pay at risk to earn a return. [-] We [/-]they just may have been lucky enough to work for a business owner that was willing to share the results of [-]our [/-]their work with [-]us [/-]them.

Working 20+ hour days, long weekends, taking phone calls from clients during family time and on and on...[-]I [/-]they EARNED them AND LBYM to make FIRE possible...

The Guv'ment made the rules on the tax code, not [-]me [/-]them!

Not everyone that benefits is a CEO or business owner.....

I would answer that income is income. I don't understand how, but somehow our system allows income to come in as cap gains to be treated differently. There are those that have found a way to game the system and get equity as income for service provided. It then gets treated differently than payroll income and taxed at 15%. Extreme case is the private equity fund advisor that gets 20% of profit for his pay, and it is taxed at 15%.

If you invest you don't get taxed twice as a previous posted suggested, only the profit gets taxed.

My point is income is income. All things equal, I would rather have income that is taxed than not have any income. I'd still invest in equity situations, rental homes and stocks with a tax of 15 or 28. When all is said, there isn't another option for me if I want to be FI and free of a job.

 

[REattempt]

I would answer that income is income. I don't understand how, but somehow our system allows income to come in as cap gains to be treated differently. There are those that have found a way to game the system and get equity as income for service provided. It then gets treated differently than payroll income and taxed at 15%. Extreme case is the private equity fund advisor that gets 20% of profit for his pay, and it is taxed at 15%.

If you invest you don't get taxed twice as a previous posted suggested, only the profit gets taxed.

My point is income is income. All things equal, I would rather have income that is taxed than not have any income. I'd still invest in equity situations, rental homes and stocks with a tax of 15 or 28. When all is said, there isn't another option for me if I want to be FI and free of a job.

I get it, I wasn't questioning the comment about income being income, or even challenging that they should be taxed the same...I was challenging the characterization...

I'm not militant about hitting those on the board that have LBYM and saved to retire, but how about the guy that gets restricted stock grants of millions and then only pays 15% on the millions he/she makes when exercising them? Why and I paying 28% when the CEO pays only 15% or less?

I WAS making a comment on the direct implication that "the guy that gets restricted stock" didn't LBYM and save to retire. I saved 30+% of my income AND LBYM AND had 15% income too. The two aren't mutually exclusive...

I think this is much akin to the "we are the 99%" broad brush stroke. There are huge shades of gray.

 

[sheehs1]

Just want to point out that the big guys at the top are not getting stock options, but stock grants... look at the new CEO at Apple.. IIRC, $366 mill worth...

Also, a gain on a stock option is considered ordinary income... that is IF you get a gain... I have some options that expire next week and I will not get a cent... but also did not pay any taxes....

Thanks TexasProud...I am not well versed at all in stock options! Your example spoke directly to one of my points in that those getting stock options may not have a gain when they are exercised. It's a risk.

Can you explain the specific difference between options and grants for me/us? It would certainly deepen my understanding.

 

[sheehs1]

I would answer that income is income. I don't understand how, but somehow our system allows income to come in as cap gains to be treated differently. There are those that have found a way to game the system and get equity as income for service provided. It then gets treated differently than payroll income and taxed at 15%. Extreme case is the private equity fund advisor that gets 20% of profit for his pay, and it is taxed at 15%.

If you invest you don't get taxed twice as a previous posted suggested, only the profit gets taxed.

My point is income is income. All things equal, I would rather have income that is taxed than not have any income. I'd still invest in equity situations, rental homes and stocks with a tax of 15 or 28. When all is said, there isn't another option for me if I want to be FI and free of a job.

Our tax code is based on "earned income" and was/is, at least for now, based on distinguishing between the various ways income is made. There is passive income, earned income, cap gains, dividends..etc. as we all know.

I don't think anyone suggested the same money was taxed twice. That only happened/s with the Death Tax. Rather the point was, money that has already been taxed is invested to generate more money. Yes the profit is what is taxed. But my point was "that" is not a given and the person has the choice of whether to put it to work so the government gets another piece or blow it buying stuff.

If it is true that "money is money" and "income is income" and/or everyone should be taxed the same or whatever one subscribes to.....then...shouldn't it be said that all subsidies and freebies should also be taxed at those rates and all should pay the same percentage on what they are now getting for free from the federal government? After all ...every citizen enjoys this great nation of ours. I actually do believe "all" should contribute to the deficit...not just some. There should be a price to pay.."by everyone"....even for those on subsidies, whether it is actual money or in "hours of service".

It bothers me greatly that some say "income is income". That may be a very slippery, deep slope. Again remember the 47% that don't pay the taxes stated above. What are we going to do when that goes to 60%?

Changing the tax code to the point of changing the definition of income is a huge deal.

Everyone is respectively entitled to their opinion.

 

[MichaelB]

Thanks TexasProud...I am not well versed at all in stock options! Your example spoke directly to one of my points in that those getting stock options may not have a gain when they are exercised. It's a risk.

Can you explain the specific difference between options and grants for me/us? It would certainly deepen my understanding.

A stock option is the right to buy a specific number of shares at a fixed price. A stock grant is a "gift" of stock. When an executive receives a stock option, it is usually "xxx number of shares, at today's closing price, good for 10 years. It has value only if the price of stock increases. The executive is then able to buy the stock at the low "option" price and sell it for market price. Stock options are considered ordinary income when exercised, but there are well documented cases of senior execs setting up complex tax schemes that let them receive the cash value of the options without paying any tax.

A grant is a transfer of stock, usually restricted, meaning it "xxx number of shares, vesting 25% per year beginning in year 4, only if the individual is still employed'. The stock is considered ordinary income when it vests, and any change in price after that is a capital gain or loss.

 

[RetireBy90]

I get it, I wasn't questioning the comment about income being income, or even challenging that they should be taxed the same...I was challenging the characterization...

I WAS making a comment on the direct implication that "the guy that gets restricted stock" didn't LBYM and save to retire. I saved 30+% of my income AND LBYM AND had 15% income too. The two aren't mutually exclusive...

I think this is much akin to the "we are the 99%" broad brush stroke. There are huge shades of gray.

Thanks for making me back off. I agree there are lots of different situations here and I'm glad I didn't get picked to figure out a fair tax system. However, in my ignorance such as it is, I don't understand why I should pay 28% income tax on IRA/401K withdrawls and rental income and my pension when others pay 15%. Help a guy out here.

One thing I will say is that I'd rather have income being taxed at 28% and have more of it than not have it at all.

 

[RetireBy90]

Our tax code is based on "earned income" and was/is, at least for now, based on distinguishing between the various ways income is made. There is passive income, earned income, cap gains, dividends..etc. as we all know.

Agreed, this is how it is defined today. I would suggest that it has been subverted by some who get "cap gains" from employeer for services rendered.

I don't think anyone suggested the same money was taxed twice. That only happened/s with the Death Tax. Rather the point was, money that has already been taxed is invested to generate more money. Yes the profit is what is taxed. But my point was "that" is not a given and the person has the choice of whether to put it to work so the government gets another piece or blow it buying stuff.

I re-read your earlier post and is often the case, I read what I wanted to not what you wrote. Dang I hate it when that happens, again and again. My bad.

If it is true that "money is money" and "income is income" and/or everyone should be taxed the same or whatever one subscribes to.....then...shouldn't it be said that all subsidies and freebies should also be taxed at those rates and all should pay the same percentage on what they are now getting for free from the federal government? After all ...every citizen enjoys this great nation of ours. I actually do believe "all" should contribute to the deficit...not just some. There should be a price to pay.."by everyone"....even for those on subsidies, whether it is actual money or in "hours of service".

Now we may be getting somewhere. How can we have 47% that get services they didn't contribute to? I knew a gentleman in Germany that had to sweep streets 4 hrs a day for 3 days a week to get his stippend from the man. All have to contribute or it is just how much more can I get from the guy that has more than me.

 

[REWahoo]

When an executive receives a stock option, it is usually "xxx number of shares, at today's closing price, good for 10 years."

On in the case of my old employer "xxx number of shares, at a price significantly higher than today's closing price, good for 10 years."

Dangle that carrot...

 

[Hamlet]

Or in the case of many CEOs in the late 90's early 00's, "xxx number of shares, at the lowest price in the last year, good for 10 years."

Stack that deck...

On in the case of my old employer "xxx number of shares, at a price significantly higher than today's closing price, good for 10 years."

Dangle that carrot...

 

[sheehs1]

A stock option is the right to buy a specific number of shares at a fixed price. A stock grant is a "gift" of stock. When an executive receives a stock option, it is usually "xxx number of shares, at today's closing price, good for 10 years. It has value only if the price of stock increases. The executive is then able to buy the stock at the low "option" price and sell it for market price. Stock options are considered ordinary income when exercised, but there are well documented cases of senior execs setting up complex tax schemes that let them receive the cash value of the options without paying any tax.

A grant is a transfer of stock, usually restricted, meaning it "xxx number of shares, vesting 25% per year beginning in year 4, only if the individual is still employed'. The stock is considered ordinary income when it vests, and any change in price after that is a capital gain or loss.

Let me see if I understand. An option is only "an option" for the right to buy the stock at a set price at the time it is given. So..if the stock price goes down, the person probably would not exercise it..right? When exercised, is the entire value considered ordinary income? So if I was given 100 stock options and exercised them at a value 0f $10, I would have to log $1,000 as income on my tax return and pay ordinary income tax rates?
How do those set up ordinary tax schemes to avoid tax on transactions such as this? Routed to a tax deferred vehicle? Routing to a Charitable Remainder Trust? In one case tax will eventually be paid and in the other, a charity is getting the benefit. Wonder what other tax deferred or tax avoidance mechanisms are used.
With grants, do I assume that income tax is paid on the 25% that vest each of the 4 years? And that after that, if there is stock appreciation it is at the cap gain rate? So ..this doesn't sound any different from those of us who buy stocks, once the grant vest. The reverse is also true, right? There could be a loss.
It sounds to me that with both options and grants, the person at some point does pay ordinary income tax. So to say they are paying only 15% at this point is not entirely true? Correct me if I am wrong. It also sounds like options and grants can be directed to other mechanisms to either defer or avoid tax but not in manners that are any different than what each of us have available to us. They may be a bit more sophisticated but I think the government has put a damper on the off shore stuff haven't they?

Is there any scenario with options or grants where one does not pay "ordinary income tax rates" at some point..?

Thanks Michael B...

 

[Hamlet]

There are different types of stock options that have different tax treatment.

Incentive stock options (ISO)--

You can get long term capital gains rates if all the conditions are met.

Non-qualified stock options (NSO)--

You always pay ordinary income rates

Here is a link--

What’s the difference between an ISO and an NSO? : Startup Company Lawyer

Let me see if I understand. An option is only "an option" for the right to buy the stock at a set price at the time it is given. So..if the stock price goes down, the person probably would not exercise it..right? When exercised, is the entire value considered ordinary income? So if I was given 100 stock options and exercised them at a value 0f $10, I would have to log $1,000 as income on my tax return and pay ordinary income tax rates?
How do those set up ordinary tax schemes to avoid tax on transactions such as this? Routed to a tax deferred vehicle? Routing to a Charitable Remainder Trust? In one case tax will eventually be paid and in the other, a charity is getting the benefit. Wonder what other tax deferred or tax avoidance mechanisms are used.
With grants, do I assume that income tax is paid on the 25% that vest each of the 4 years? And that after that, if there is stock appreciation it is at the cap gain rate? So ..this doesn't sound any different from those of us who buy stocks, once the grant vest. The reverse is also true, right? There could be a loss.
It sounds to me that with both options and grants, the person at some point does pay ordinary income tax. So to say they are paying only 15% at this point is not entirely true? Correct me if I am wrong. It also sounds like options and grants can be directed to other mechanisms to either defer or avoid tax but not in manners that are any different than what each of us ourselves have available to us. They may be a bit more sophisticated but I think the government has put a damper on the off shore stuff haven't they?

Is there any scenario with options or grants where one does not pay "ordinary income tax rates" at some point?

Thanks Michael B...

 

[MichaelB]

How do those set up ordinary tax schemes to avoid tax on transactions such as this? Routed to a tax deferred vehicle? Routing to a Charitable Remainder Trust? In one case tax will eventually be paid and in the other, a charity is getting the benefit. Wonder what other tax deferred or tax avoidance mechanisms are used.

The most common method was to transfer the shares to a specially created trust, borrow an amount equal to the market value of the option shares and use the options as collateral, and let the lender take the shares plus appreciated option value. Very complex area, with some of the best and brightest minds continually looking for ways to enable schemes like this.

With grants, do I assume that income tax is paid on the 25% that vest each of the 4 years? And that after that, if there is stock appreciation it is at the cap gain rate? So ..this doesn't sound any different from those of us who buy stocks, once the grant vest. The reverse is also true, right? There could be a loss.

Correct

It sounds to me that with both options and grants, the person at some point does pay ordinary income tax. So to say they are paying only 15% at this point is not entirely true?

Yes, mostly, and it is a common misunderstanding.

Correct me if I am wrong. It also sounds like options and grants can be directed to other mechanisms to either defer or avoid tax but not in manners that are any different than what each of us have available to us. They may be a bit more sophisticated but I think the government has put a damper on the off shore stuff haven't they?

I don’t understand the question

Is there any scenario with options or grants where one does not pay "ordinary income tax rates" at some point..?

Corporate executives that receive stock based compensation are taxed as described above and pay income tax and medicare tax, but social security tax only within the yearly limits. Qualified stock options have a special tax treatment that give option recipients the option of paying lower, capital gains tax rates, but also have a unique tax risk and they are not generally being used any longer.

Also, as indicated previously, hedge funds and private equity funds, are taxed at capital gains tax rates even thought their compensation is “ordinary income”. Much of how executives are paid and taxed is poorly understood by the media, but that does not hold them back from spreading their message far and wide.

 

[sheehs1]

There are different types of stock options that have different tax treatment.

Incentive stock options (ISO)--

You can get long term capital gains rates if all the conditions are met.

Non-qualified stock options (NSO)--

You always pay ordinary income rates

Here is a link--

What’s the difference between an ISO and an NSO? : Startup Company Lawyer

Thanks Hamlet. Interesting. So regardless at some point, ordinary income tax is paid on a stock option or grant. I get that the stock price can be manipulated or that the CEO may get it at a low set point..etc. but that doesn't seem to be anyones business. He/she will,at some point, pay ordinary income tax or give it to charity to get a tax deduction or whatever.

It is also relevant that whether it be an option or a grant, it carries the risk of loss. (Enron).

Is part of the argument then that a LARGE part of CEO income "could be" in these options/grants...so that eventually a LARGE part of their net worth, "once they have paid ordinary income tax on the option/grant..." is then subject only to the 15% cap gains or dividends on the growth of that basis?
But the point is well taken that at some point that did pay the ordinary tax rate.

How is this any different from anyone who inherits 2 million in cash (or less) and doesn't pay tax on it since the Unified Tax Credit is 3 million, chooses to invest it and only pays the 15% from that point forward?

So one point of the argument isn't really about stock options and grants ...is it? It is about anyone that accumulated "something", paid their fair share of ordinary income tax and is now taxed at 15%.

Sounds to me the like government and the current rhetoric is VERY short sited. If one looks at this in terms of "a curve", then one can make the argument that they are trying to "speed up" what they would get anyway over 1 to 30 years, in a sense. Speed it up AND get more. But it is the "get more" part that could back fire. They are trying to shorten the tax curve. Fair statement or not? Could this not lead to there being "less" in tax revenues down the road? If they take more now, then there possibly will be less to generate that revenue later. ummmmm....

Either that...or it is simply being used as a political tool, as a running platform or to deliberately shake things up.

 

[ERD50]

Thanks for making me back off. I agree there are lots of different situations here and I'm glad I didn't get picked to figure out a fair tax system. However, in my ignorance such as it is, I don't understand why I should pay 28% income tax on IRA/401K withdrawls and rental income and my pension when others pay 15%. Help a guy out here.

One thing I will say is that I'd rather have income being taxed at 28% and have more of it than not have it at all.

OK. Lets look at two people with cap gains, and this scenario can happen on any given day:

Person A buys $X worth of stock. Two years later, it is worth 1.1X. He sells and owes a 15% tax on the 10% gain.

Person B buys $X worth of stock. Twenty years later, it is worth 1.1X. He sells and owes a 15% tax on the 10% gain.

For Person A, inflation over the two years would have been ~ 6% (assume 3% average 1.03^2 ~ 1.06), so that 10% gain only looks like ~ 4% gain in buying power.

For Person B, inflation over the twenty years would have been ~ 80% (1.03^20 ~ 1.8), so that 10% 'gain' is a loss in buying power. He would need 1.8X just to keep up and claim an actual 'profit' over inflation. But he has only 1.1X, that's a big loss. Yet, he is taxed the same as A, and almost the same as someone making income in the present year.


You are right, it isn't fair - we should eliminate cap gains tax, not just reduce it.

All this talk about defining income takes me back to the National Sales Tax approach. I actually do think that would be best. Tax what you spend, it takes away all the complexity of where, when and how you made the money. It captures illegal income, too. The very few rich people who are not spending accordingly probably aren't earning a lot of currently taxable income anyhow, so I don't think that's a big deal.

-ERD50

 

[Sand Pounder]

There are different types of stock options that have different tax treatment.

Incentive stock options (ISO)--

You can get long term capital gains rates if all the conditions are met.

Non-qualified stock options (NSO)--

You always pay ordinary income rates

Thanks, Hamlet. That clears it up.

Rather than implement a whole new tax with all its unintended consequences, why not simply close that particular loophole in the tax code?

 

[RetireBy90]

So if I am to believe that I understand what was posted by MichaelB Hamlet and Sheehs1 then the vast majority of compensation is taxed at the same rates I pay and not at cap gains. Correct?

 

[TromboneAl]

This article should serve to remind us how lucky we LBYMers are that we often fall below the radar on tax issues. For example,
paying almost no tax on large Roth conversions.