Unrealized Capital Gains tax

[CRLLS]

Mdlerth, I had to check on your statement. You may both be right. If the stock given I unrestricted, it is taxed as you mention. If it is restricted stock award, then it is must be taxed no later than when the restrictions are satisfied at the value of stock at that time. The receiver has the option to file when received and taxed at that time, allowing gains (if any) to be taxed at capital gains rate. Any way you look at it, there is tax to be paid. A "Qualified small business" has different rules. I don't think that EM's companies meet those definitions.

https://www.sba.gov/blogs/rewarding-employees-company-stock

 

[Running_Man]

I don't have any data to dispute this, but how did he manage it? There were times during my career when part of my compensation was in company stock. I was taxed on it based on its share price the day it was awarded. How did EM escape?

He was given unrestricted shares that could be sold for tax value when issued, the gains on the remainder of shares were never taxed and were subject to further restrictions. So he did pay taxes on his"compensation",but

 

[GrayHare]

I don't have any data to dispute this, but how did he manage it? There were times during my career when part of my compensation was in company stock. I was taxed on it based on its share price the day it was awarded. How did EM escape?

Did he put it into a Roth IRA? I think that's what Zuckerberg did with a portion of his FB stock.

To a certain extent we as a country want to reward entrepreneurs for inventing what they did. Most that become ultra-wealthy eventually donate large most of their wealth to good causes. Andrew Carnegie funded thousands of libraries. The Gates Foundation is funding many medical research efforts. Even mere millionaires do similar, but on a smaller scale.

 

[Running_Man]

If Elon or Warren is your point of reference, the laws should be changed regarding that.

Virtually every company is set up to allow their executives to take their income in shares to avoid taxes. Berkshire explicitly states they do not pay a dividend because it would create a tax event.

Companies announced buybacks of 1.1 Trillion in 2018 explicitly to create value for shareholders exempt from taxes, this is accomplished by utilizing tax deductible borrowings by the company, leveraging for tax benefits to shareholders. I do not think this is a particularly difficult concept to grasp or that the implementation would be very difficult, so I think the implementation is more likely than not in the next couple of years. Stock buybacks by companies were illegal until the SEC authorized them in 1982.

 

[Independent]

I'm in favor of taxing unrealized gains for the extremely wealthy. Let's say for people with assets over $100 million. At that point, we don't care about valuing a primary residence or boats or cars properly, they probably have trivial capital gains.

Most of the assets at that level are in public companies, bonds and other financial instruments, and commercial real estate. The real estate is already valued for property tax purposes.

I understand the concern about whip-sawing. This would be my rule: calculate the taxable gain using the lowest price in the last three years. Suppose I buy a stock for $100 in 2001 and these are the annual lowest prices and ending prices.

Year	Lowest	Ending
2001	90	120
2002	110	135
2003	125	150
2004	140	170

There is no taxable unrealized gain in 2001, 2002, or 2003 because the lowest last-three-years price in those years is $90 and it is below the purchase price of $100.

There is a taxable unrealized gain in 2004. It is $110-$100 = $10.

(on the other side, calculate the unrealized capital loss based on the highest price in the last three years)

This rule taxes the huge gains of the richest while protecting both the taxpayer and the gov't from temporary market swings.


Regarding the question of minority shares, my rule would be that the sum of the owners' interests have to add up to the value of the property. Within that requirement, there could be a variety of acceptable splits.

 

[SecondCor521]

Did he put it into a Roth IRA? I think that's what Zuckerberg did with a portion of his FB stock.

If he did, he only put about $5,500 per year (double that for Zuckerberg since he's married). Any more than that and a 6% per year tax penalty would be due on the value of anything contributed above that amount and not removed by the appropriate deadline.

 

[GrayHare]

If he did, he only put about $5,500 per year (double that for Zuckerberg since he's married). Any more than that and a 6% per year tax penalty would be due on the value of anything contributed above that amount and not removed by the appropriate deadline.

Well, when they do the contribution they value the shares at $0.0001 each.

 

[OldShooter]

... This is why Berkshire would immediately begin to pay a large dividend - a 25% tax on 15% of a company requires a 4% dividend once you are past the first year the accumulated basis would make the tax less than the dividend
...

You miss the point. What value would be used to calculate the tax? Buffet holds a highly illiquid position that could not be sold at anywhere the current BRK stock price. Same-o for any major stockholder. The Ford family, probably. Gates ... Walton family, ...

... Most of the assets at that level are in public companies, bonds and other financial instruments, and commercial real estate. The real estate is already valued for property tax purposes. ...

I think you're wrong on that. Anyway, a large position in a public company is very difficult to value. Private equity? Nearly impossible to value, especially in cases where the position is locked in for x years and cannot be unwound. And I'd bet that few of the really wealthy hold real estate directly, they are probably partial owners through some REIT or other entity.

And the model is not static; people optimize their situations for tax avoidance. In the zero-probability event of something like this actually happening, hard-to-value assets like art and jewelry will become very popular.

 

[Running_Man]

You miss the point. What value would be used to calculate the tax? Buffet holds a highly illiquid position that could not be sold at anywhere the current BRK stock price. Same-o for any major stockholder. The Ford family, probably. Gates ... Walton family, ...

.

I thought you believed nothing was more efficient than the stock market in valuing securities?

When the Rohm and Haas family decided they wanted to sell their 50% stake in Rohm and Haas they sold it for a premium to the market not a discount. Elon Musk said he was going to buy all the shares of TESLA for a higher price than the market. Toys are us was taken private at double their stock price.

I suspect that if Warren decided he wanted to sell someone would buy the controlling interest in the company at a price above market.

 

[SecondCor521]

Well, when they do the contribution they value the shares at $0.0001 each.

I'm pretty sure that would be illegal, especially for a publicly traded company. You can't just arbitrarily assign a value; you have to use FMV, which is well established by the IRS for a publicly traded company as the average of the high and the low for any trading date (aside from other posters' comments on this thread about what the actual economic value of large holdings of the stock).

As an aside, I'm pretty sure you cannot contribute stock to an IRA. I thought all contributions had to be made in cash and then you could purchase the stock inside the IRA. A quick Google check confirms this from several non-authoritative sites.

 

[pb4uski]

For public stock you could use the share price.... it wouldn't pick up the control premium but at least it is an objective measure of value of a minority interest. Close enough.

 

[Mdlerth]

I think it was Whatshisname, that guy from Whereveritwas

I've already forgotten which politician's comments prompted this fascinating discussion, but whoever it is I hope he's reading this thread!

I'm learning a lot, not to mention enjoying it immensely. My thanks to all the contributors so far.

 

[MichaelB]

Zuckerberg was awarded 120 million options valued at $.06 before Facebook went public. This was after he sold ownership to raise venture funding. How shares in a privately owned company are valued is complex, and in this case the board clearly gave him an advantage.

If the stock is publicly traded the shares must be valued at market price. There were many cases of backdating back in the early aughts, most resolved (the ones actually caught) without prosecution.

 

[Winemaker]

I am not.

Me either.

What if my bottles of Cabernet are worth more than what they were worth last year. Or my freezer of beef? Or my avocados?

 

[OldShooter]

I thought you believed nothing was more efficient than the stock market in valuing securities?

Please stop repeating this inaccurate statement.

When the Rohm and Haas family decided they wanted to sell their 50% stake in Rohm and Haas they sold it for a premium to the market not a discount. Elon Musk said he was going to buy all the shares of TESLA for a higher price than the market. Toys are us was taken private at double their stock price.

I suspect that if Warren decided he wanted to sell someone would buy the controlling interest in the company at a price above market.

You make my point for me. No one knows what these large positions are worth until a sale occurs.

 

[wmc1000]

Me either.

What if my bottles of Cabernet are worth more than what they were worth last year. Or my freezer of beef? Or my avocados?

Eat, Drink and Be Merry by December 31st!

 

[pb4uski]

.... No one knows what these large positions are worth until a sale occurs.

True, but in most cases they are worth more than the trading price for minority interests so to use the current share price is conservative and objective.

 

[youbet]

Why would they engineer in a guaranteed confounder?

Because that is their mission and they'll hell bent on succeeding?

 

[SecondCor521]

Zuckerberg was awarded 120 million options valued at $.06 before Facebook went public. This was after he sold ownership to raise venture funding. How shares in a privately owned company are valued is complex, and in this case the board clearly gave him an advantage.

If the stock is publicly traded the shares must be valued at market price. There were many cases of backdating back in the early aughts, most resolved (the ones actually caught) without prosecution.

I'm sure Zuckerberg made out very well on his pre-IPO options. I still don't think he could have put those options inside an IRA, as someone else has claimed on this thread.

This would be doubly or triply true for the situation you describe, because (a) I really doubt you can find a custodian who would let you buy private company stock inside a Roth IRA, and (b) even if you could satisfy (a), the only way I can see to get those 6 cent options inside the Roth IRA would be for Zuckerberg to sell them to the Roth IRA custodian, which I think is against the self-dealing rules. And of course (c) you can't contribute stock to an IRA, which I assume would include stock options as well.

 

[MichaelB]

I'm sure Zuckerberg made out very well on his pre-IPO options. I still don't think he could have put those options inside an IRA, as someone else has claimed on this thread.

He exercised the options and sold the stock, so they couldn’t have been in an IRA.

 

[Running_Man]

Please stop repeating this inaccurate statement.

You make my point for me. No one knows what these large positions are worth until a sale occurs.

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?

 

[Independent]

You miss the point. What value would be used to calculate the tax? Buffet holds a highly illiquid position that could not be sold at anywhere the current BRK stock price. Same-o for any major stockholder. The Ford family, probably. Gates ... Walton family, ...


I think you're wrong on that. Anyway, a large position in a public company is very difficult to value. Private equity? Nearly impossible to value, especially in cases where the position is locked in for x years and cannot be unwound. And I'd bet that few of the really wealthy hold real estate directly, they are probably partial owners through some REIT or other entity.

And the model is not static; people optimize their situations for tax avoidance. In the zero-probability event of something like this actually happening, hard-to-value assets like art and jewelry will become very popular.

I'd value a large position in a public company as (number of shares) x (market price). You'll say that's not theoretically perfect. I'll say this is tax law, not an exercise in theoretical perfection.

(Note that large positions are harder to maintain if we tax unrealized gains. Over the years, Zuckerberg would have had to sell shares of Facebook to raise cash for his taxes. Facebook's ownership would be spread more widely.)

I don't know why holding real estate in a REIT rather than directly should impact taxes.

If Z and many of the 500 other US billionaires try to buy jewelry and art instead of holding stock, then the IRS can do an index of art/jewelry resales and infer capital gains from that. Note that the Forbes 400 has a combined net worth of $2.8 trillion. Wikipedia has a list of "most expensive" paintings. Eyeballing that list, I think the total likely value is small relative to the asset of these individuals. https://en.wikipedia.org/wiki/List_of_most_expensive_paintings

 

[GrayHare]

How A Serial Entrepreneur Built A $95 Million Tax Free Roth IRA

"Levchin isn’t the only tech titan who’s got a shrewd tax advisor. Buried in recent SEC filings for Facebook, Zynga and LinkedIn are other examples of legal moves the ultrarich use to shield big dollars from the taxman. These techniques are available to the merely well-off, too, but they produce the most dramatic savings when executed early in a hot company’s—or hot entrepreneur’s—life."

https://www.forbes.com/sites/debora...ok-billionaires-dodge-mega-millions-in-taxes/

 

[Winemaker]

He exercised the options and sold the stock, so they couldn’t have been in an IRA.

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.

 

[CardsFan]

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.