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People are missing the point. This is not a tax dodge in the sense that you never pay the taxes. It’s a tax dodge in the sense that you postpone paying taxes in
by URSpider94 8y ago
People are missing the point. This is not a tax dodge in the sense that you never pay the taxes. It’s a tax dodge in the sense that you postpone paying taxes in the year when they are due (which is the most common kind of tax dodge).
It’s absolutely correct that the ETF shareholders will pay the tax one way or another, either now on an annual cap gains distribution, or when they sell the shares later. It is NOT double taxation, because you either pay now or later, not both.
The issue is that the government cares deeply that you pay taxes in the year that you incur them. The US government, as you may know, has massive debt, and so getting the tax later costs it money in interest payments. They care about this so much that if you owe a lot in taxes, you actually have to pay them in quarterly installments, so the Feds don’t have to wait a whole year to get your money.
Since ETF’s are buy-and-hold investments, it could literally be decades before you actually send in a check for taxes that would ordinarily be due today.
- AnthonyMouse 8y ago> The issue is that the government cares deeply that you pay taxes in the year that you incur them. The US government, as you may know, has massive debt, and so getting the tax later costs it money in interest payments. They care about this so much that if you owe a lot in taxes, you actually have to pay them in quarterly installments, so the Feds don’t have to wait a whole year to get your money. Which is very silly, because the government pays a lower interest rate on its debt than the average returns from the stock market. So the government would actually come out ahead to carry more debt now and allow you to accrue more taxable appreciation, because the tax paid on the market gains from the money not paid in tax until later are more than the interest the government has to pay on its debt in the meantime.
- cheerlessbog 8y agoI may equally lose that money. There's a reason that government debt pays less. The sooner they get their money, the less time it is exposed to that risk.
- AnthonyMouse 8y agoFrom the perspective of the government the risk is extremely diversified -- across all taxpayers and all investments. And it remains the case that the average returns from the stock market exceed the average interest rate on US government debt.
- cheerlessbog 8y agoIf you squint, that is a Keynesian argument, since it potentially justifies government borrowing more money and handing it out for the economy to invest. It is just a matter of degree - again my point that it is not necessarily a good idea.
- zAy0LfpBZLC8mAC 8y ago> They care about this so much that if you owe a lot in taxes, you actually have to pay them in quarterly installments, so the Feds don’t have to wait a whole year to get your money. That's really not about interest, but about credit risk. If a tax payer goes broke, they don't want to lose a whole year of taxes.
- wutbrodo 8y agoThe time value of money (and thus interest) is in part by driven by the risk of the future payout not happening, so these aren't really separate phenomena.
- zAy0LfpBZLC8mAC 8y agoBut the interest the state is paying is not driven very much by the credit risk from individual tax payers.
- Retric 8y agoTime value of money, delaying taxes lowers them.
- cameldrv 8y agoThis type of deferral does end up being a tax dodge if the ETF is inherited. As of 2018, you get to leave up to 11 million to your heirs tax free, AND they get a free step up in cost basis.