Unrealized Capital Gains tax

[SecondCor521]

One big "loophole" for the uber wealthy was to have stock issued to them, put in IRA, before going public, then selling after the IPO. It's how Romney got slammed with Bain Capital.

As noted above, you can't put stock into an IRA.

Further, the tax code does not have exceptions for uber wealthy people. In fact tends to place restrictions on people with higher incomes (you can't contribute to Roth IRAs above a certain income, you can't deduct traditional IRA contributions above a certain income, you can't take many education tax credits and deductions above a certain income, etc.).

If you don't agree, I would appreciate if you could please cite one example of a tax loophole that are restricted to uber wealthy people. I'm always interested in learning.

 

[Sunset]

It could be years before people sell stocks/MFs/ETFs. You'd have to go through a calculation every year to determine unrealized capital gains/losses. For example, at 12/31/2020, if the stock was down to $120, you'd get to deduct $10/per share times the applicable tax rate, right? ($120 new year-end basis minus the $130 previous year-end basis.)

If my assets went down, it's not a deduction I want it's CASH. The gov't can pay me for a drop in value of my assets. Just like they would expect me to pay for an increase.

 

[Brat]

This makes little sense to me, I don't understand how it would work. The Senator mentioned doesn't need that proposal for election purposes, maybe it is an example of Elizabeth Warren's tax the rich proposal. If that is the case I don't see it gaining support.

 

[SecondCor521]

This makes little sense to me, I don't understand how it would work. The Senator mentioned doesn't need that proposal for election purposes, maybe it is an example of Elizabeth Warren's tax the rich proposal. If that is the case I don't see it gaining support.

I think it is what they call a "trial balloon". As noted in at least one news article I read, this proposal has zero chance of becoming law until after the 2020 elections.

 

[Running_Man]

As noted above, you can't put stock into an IRA.

Further, the tax code does not have exceptions for uber wealthy people. In fact tends to place restrictions on people with higher incomes (you can't contribute to Roth IRAs above a certain income, you can't deduct traditional IRA contributions above a certain income, you can't take many education tax credits and deductions above a certain income, etc.).

If you don't agree, I would appreciate if you could please cite one example of a tax loophole that are restricted to uber wealthy people. I'm always interested in learning.

Look at the link posted above by GRAYHARE Lechvin pal of Thiel put 85million in stock in his, purchased private company stock at 35 cents goes public and worth millions. Zuckerberg opened a GRATS account worth million. Lechvin has Google stock worth 100's of millions more in his account.

 

[Running_Man]

As noted above, you can't put stock into an IRA.

Further, the tax code does not have exceptions for uber wealthy people. In fact tends to place restrictions on people with higher incomes (you can't contribute to Roth IRAs above a certain income, you can't deduct traditional IRA contributions above a certain income, you can't take many education tax credits and deductions above a certain income, etc.).

If you don't agree, I would appreciate if you could please cite one example of a tax loophole that are restricted to uber wealthy people. I'm always interested in learning.

.
Specifically for wealthy people to pass hundreds of millions to their kids and avoid tax, nice thing is the assets are available to use while you are alive and then just transfer to your heirs tax free.
https://www.investopedia.com/terms/g/grat.asp

 

[Independent]

Does any one here really think this is an effective way to tax?
On Assets?
And does any here think it will only apply to the "Uber-wealthy" years from now?

I don't think it will ever go anywhere, but if it does, we are doomed.

I do. We tax wages the same year they are earned, I think we should tax investment income the same year it is earned.
This is a tax on the income derived from assets. The interest I earn on a CD is also income derived from assets. I pay tax on that interest in the same year I earn it.
I'd certainly start with the uber-wealthy. Maybe it works well, and 50 years from now the voters decide to lower the threshold wealth. If so, that's their decision.

I agree that, in terms of actual legislation that gets passed, this has a snowball's chance. The uber-wealthy have clout in congress.

 

[OldShooter]

Okay then I am misunderstanding your point of previous threads on passive investments. What is you position on the price of stocks as reflected in indexes?

Well, the stocks in indexes have prices. No surprise there. Actually the stocks not in indexes also have prices.

(If you're referring to passive investing, the EMH has absolutely nothing to do with it pro or con. There are some specious arguments out there, though, that begin by asserting the false premise that passive investing is based on the EMH. The form of the argument is then to attack the EMH with the hope that people will conflate the two unrelated topics. Fidelity is one that has published such nonsense.)

 

[Independent]

If you don't agree, I would appreciate if you could please cite one example of a tax loophole that are restricted to uber wealthy people. I'm always interested in learning.

"The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread." Are you talking about the text of the law or the effect of the law?

If you're looking for a favorable tax provision that specifically requires income or wealth above some number, then I can't think of any.

If you're looking for something that benefits the "rich" far more than ordinary people, how about

capital gains treatment for carried interest, or
capital gains rates below ordinary income rates, or
step up on basis at death, or
(getting back to the thread topic) deferral of taxes on capital gains?

 

[SecondCor521]

Look at the link posted above by GRAYHARE Lechvin pal of Thiel put 85million in stock in his, purchased private company stock at 35 cents goes public and worth millions. Zuckerberg opened a GRATS account worth million. Lechvin has Google stock worth 100's of millions more in his account.

I read the article that GrayHare linked. The article says no such thing. What I think Levchin did was deposit money into his IRA, purchase stock that subsequently went up in value to $85M.

I still don't think you can purchase private stock within an IRA. The article also says no such thing on this point.

These guys may be wealthier and more clever than me, but they didn't accomplish what they did through any means that I couldn't have done due to minimum wealth limits.

.
Specifically for wealthy people to pass hundreds of millions to their kids and avoid tax, nice thing is the assets are available to use while you are alive and then just transfer to your heirs tax free.
https://www.investopedia.com/terms/g/grat.asp

Again, there is no minimum income or wealth level on who can use a GRAT. Practically speaking, the cost of a CPA and/or attorney to set one up may mean that it doesn't make sense for people at lower wealth levels, but a quick Google suggests that one can set up a GRAT for a couple thousand dollars.

"The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread." Are you talking about the text of the law or the effect of the law?

If you're looking for a favorable tax provision that specifically requires income or wealth above some number, then I can't think of any.

If you're looking for something that benefits the "rich" far more than ordinary people, how about

capital gains treatment for carried interest, or
capital gains rates below ordinary income rates, or
step up on basis at death, or
(getting back to the thread topic) deferral of taxes on capital gains?

I'm arguing against the insinuation that people accrue wealth because they use a different set of rules or laws than the rest of us. Most of the time I think it is because they created businesses that provide economic value (Facebook, Google, SpaceX, Tesla), or because they made a concentrated investment that paid off.

As far as the examples you give, I don't know much about carried interest, but the other three you list all apply to everyone regardless of income level.(*) If you want to make the argument that wealthy people get a greater benefit from these laws because they have more money or because they get a greater percentage of their income via investments, then that seems very much like a circular argument to me.

(*) The difference between OI and cap gains rates does vary with income level, but it's not progressively better as far as I can tell by looking at single filer brackets. I also don't know how NIIT comes and other filing statuses come into play.

 

[audreyh1]

Does a GRATs account have anything to do with a Roth IRA?

 

[wolf]

You have a basis, a year end value and you pay taxes, your new basis is the year end tax basis. When you sell the stocks they go against the adjusted basis, quite simple actually.

Example Buy stock at 100 on 3/16/2019

At 12/31/2019 stock is at 130. Income is number of shares X (130-100) times the applicable tax rate.

So, How does the taxpayer pay the additional tax due. It's not earned income.
There is no withholding. There is no estimated tax paid. Stock market is a moving target.

Suppose the taxpayer, must sell the stock, in order to may the unrealized gain.

What is the new basis. These politicians are really idiots.

At least think before speaking.

 

[Sunset]

Well this will cause a bull market in bit coin, and a lot more buried gold. Both ways to escape the tax man.

 

[triangle]

This, this form of taxation already applies to houses: property taxes (percentage taxation of assessed value each year). Apparently it works so well for real estate (filling the coffers on a county/state level) that it needs to apply to all assets......

Yearly property taxes are in addition, usually to fund local schools and police/fire services.

IIRC before 1997 (Taxpayer Relief Act of 1997) people paid capital gains taxes on the sale of their homes. Which caused some minor property inflation in southern cities as people sold their higher priced homes in the northeast and moved south and tended to buy bigger homes on larger lots to avoid getting taxed. Since 1997 I believe there is a personal exemption of 250K or 500K per couple. Which IMO still unfairly punishes those who live in their home for a long time and allows the IRS to partially confiscate assets primarily due to inflation. Maybe someone wants to retire and downsize their home; or pay for medical expenses, travel, etc.

 

[triangle]

I do. We tax wages the same year they are earned, I think we should tax investment income the same year it is earned.
This is a tax on the income derived from assets. The interest I earn on a CD is also income derived from assets. I pay tax on that interest in the same year I earn it.
I'd certainly start with the uber-wealthy. Maybe it works well, and 50 years from now the voters decide to lower the threshold wealth. If so, that's their decision.

I agree that, in terms of actual legislation that gets passed, this has a snowball's chance. The uber-wealthy have clout in congress.

Income is already being taxed in the year (quarter) it is generated. Though a stock certificate, building title, lump of gold, etc, does not generate income.

Interest on a CD or bond is different than holding a company stock or improving a private business. That income has not been taxed which is the reason it is taxed at the individual level.

Wage earnings taxation is similar. Employee wages are paid out of the corporate earnings/income before any taxes are paid (it is a deduction to the corporation). So only taxed once at the individual level.

Income used to pay out stock dividends have already been taxed at the corporate level. I understand some people like them being taxed again and want the rates to be higher. I can't wait for some to propose taxing funds moved between a husband's and wife's accounts. Since one party of the "joint partnership" is receiving free money and is not paying any taxes on it.

 

[Winemaker]

As noted above, you can't put stock into an IRA.

Further, the tax code does not have exceptions for uber wealthy people. In fact tends to place restrictions on people with higher incomes (you can't contribute to Roth IRAs above a certain income, you can't deduct traditional IRA contributions above a certain income, you can't take many education tax credits and deductions above a certain income, etc.).

If you don't agree, I would appreciate if you could please cite one example of a tax loophole that are restricted to uber wealthy people. I'm always interested in learning.

Perhaps I misspoke about shares of a company, but the suggestion of partnership shares was alluded to in this article. And no, these are not limited to the "Uber wealthy" section of the tax code, but unintended circumstances are always found/created by those who have the where-with-all to find/create/use. More power to them.

https://www.reuters.com/article/us-...romneys-ira-grow-so-big-idUSTRE80N04E20120124

 

[Running_Man]

So, How does the taxpayer pay the additional tax due. It's not earned income.
There is no withholding. There is no estimated tax paid. Stock market is a moving target.

Suppose the taxpayer, must sell the stock, in order to may the unrealized gain.

What is the new basis. These politicians are really idiots.

At least think before speaking.

If you sell the stock the basis is the year end price, you would have realized gains or losses on the stock you sold and unrealized gains on the stocks you hold. This is no more difficult than it is to value stocks you purchase now, does anyone really have difficulty determining their basis in a stock investment? Is this really a term investors do not comprehend?

This is certainly less complicated than fixed assets in a business. I am amazed it is not understood how easy it is to compute this.

 

[CRLLS]

Assets, Investments, collectibles, Tax, no-tax. We can dance around using these terms, each of us defining what they mean in our own mind. Also we each feel what is "fair" game to tax. I'm beginning to hate seeing or using that word with tax related discussions. Most of the original discussion here (ignoring the side discussion of stock in IRAs) boils down to whether "unrealized gains" are considered "income" or not. My position is that it is not income. I know others feel differently. I ask myself,"Why add more complication to our tax forms and record keeping? What is the benefit". The feds will get their tax money from me soon enough if they do nothing with this proposal. This only serves the tax professionals who do your taxes every year. Them and maybe the software engineers at the stock trading companies.

 

[Independent]

So, How does the taxpayer pay the additional tax due. It's not earned income.
There is no withholding. There is no estimated tax paid. Stock market is a moving target.

Suppose the taxpayer, must sell the stock, in order to may the unrealized gain.

What is the new basis. These politicians are really idiots.

If your primary concern is "moving target", I'm sure there are multiple ways to fix that. I propose one in this post http://www.early-retirement.org/forums/f44/unrealized-capital-gains-tax-97144-3.html#post2216982

Yes, sometimes taxpayers will sell stock to raise cash. I don't see the problem with that. If the asset is less divisible, like real estate, they can borrow against the increased value. A nice problem to have.

 

[RAchip]

"they can borrow against the increased value"

You want people to have to borrow to pay "income" taxes? That, to me, is patently ridiculous. The idea of taxing unrealized paper gains is just more socialist/communist wealth confiscation talk.

 

[Mdlerth]

Heads will roll, so invest today in Consolidated Guillotine Co.

"they can borrow against the increased value"

You want people to have to borrow to pay "income" taxes? That, to me, is patently ridiculous. The idea of taxing unrealized paper gains is just more socialist/communist wealth confiscation talk.

It's also why they instituted withholding. When there's regular cash flow in the form of wages, the IRS can siphon off a portion early and the wage earner gets used to it. Imagine two hundred million taxpayers, at every income level, getting an April tax bill for which they had made no provision.

Remember all those articles about how most folks don't have a spare thousand to deal with an unexpected car repair or doctor bill? And now they're gonna be set up for failure by receiving a tax surprise because their stocks/land/ETFs increased in value without necessarily dispensing any cash flow?

There would riots and bloodshed and smoking ruins.

 

[Independent]

I ask myself,"Why add more complication to our tax forms and record keeping? What is the benefit". The feds will get their tax money from me soon enough if they do nothing with this proposal. This only serves the tax professionals who do your taxes every year. Them and maybe the software engineers at the stock trading companies.

I expect that you aren't planning to leave an estate valued at more than $100 million. If you were, you'd probably have enough unrealized capital gains to think about this.

... unrealized capital gains account for ... about 55 percent of the value of estates worth more than $100 million.

https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax
The feds will get no income tax at all from that 55%. The decedents didn't pay income taxes on it during their lifetimes, and their heirs won't pay income taxes on it due to step-up-in-basis.

Tax professionals make money from our current system by creating awkward financial arrangements just to allow the ultra rich to spend their capital gains without triggering a "sale". https://www.investmentnews.com/arti...are-aware-of-tax-loophole-on-unrealized-gains

 

[Independent]

I'm arguing against the insinuation that people accrue wealth because they use a different set of rules or laws than the rest of us. Most of the time I think it is because they created businesses that provide economic value (Facebook, Google, SpaceX, Tesla), or because they made a concentrated investment that paid off.

As far as the examples you give, I don't know much about carried interest, but the other three you list all apply to everyone regardless of income level.(*) If you want to make the argument that wealthy people get a greater benefit from these laws because they have more money or because they get a greater percentage of their income via investments, then that seems very much like a circular argument to me.

(*) The difference between OI and cap gains rates does vary with income level, but it's not progressively better as far as I can tell by looking at single filer brackets. I also don't know how NIIT comes and other filing statuses come into play.

I didn't intend to insinuate anything like that.

I think that the great majority of workers provide economic value when they work. They get paid for that work and they pay taxes on their pay. Generally, we expect tax rates to be higher for higher paid people.
Some people start businesses and provide economic value and get paid for that. I think they should pay taxes, too. And, if they make a lot of money, their rates should be higher.

Wikipedia has an article on carried interest.
Yes, the point of my quote was that laws can have a disparate impact even if they don't draw lines within their text. In practice, the benefits of deferring taxes on unrealized capital gains go overwhelmingly to the wealthiest Americans.

Wyden's extremely short teaser on this topic refers to "millionaires and billionaires" and "the wealthy". I said above that I would limit the taxation of unrealized gains to those with assets over $100 million.

 

[GrayHare]

The feds will get no income tax at all from that 55%. The decedents didn't pay income taxes on it during their lifetimes, and their heirs won't pay income taxes on it due to step-up-in-basis.

The step up in basis is for simplicity since heirs may not be able to find a cost basis from the decedent's records. The revenue lost from the step-up is recaptured by the estate tax.

 

[Mdlerth]

What could be fairer?

I would limit the taxation of unrealized gains to those with assets over $100 million.

I would limit it to anybody with more assets than I have.