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If I sell my car and buy another for the same price, should I avoid sales tax? Making it possible to trade stocks without tax consequences may make it easier t

If I sell my car and buy another for the same price, should I avoid sales tax? Making it possible to trade stocks without tax consequences may make it easier to better deploy capital, but it would also have a destabilizing effect, because it could make the markets more exposed to emotional reactions and poor information.

AnthonyMouse 8y ago
> If I sell my car and buy another for the same price, should I avoid sales tax? Did the person you sold your old car to have to pay an equal amount of sales tax? Because in that case yes. > Making it possible to trade stocks without tax consequences may make it easier to better deploy capital, but it would also have a destabilizing effect, because it could make the markets more exposed to emotional reactions and poor information. This sounds like the argument a monopolist makes for why competition is bad.
- cheerlessbog 8y ago
  > Did the person you sold your old car to have to pay an equal amount of sales tax? Because in that case yes If you like, but that is not how sales tax works. My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable. Arguably, by selling my car, I am better deploying economic resources, as the other guy evidently had more use for it than I do. If we taxed only translation into cash, the largest fortunes would grow the most rapidly of all, as wealthy people have less use for cash, proportionally. That's arguably against the public interest. Anyway - I am not taking a position - I am observing that it is not illogical to prefer the current system.
  - AnthonyMouse 8y ago
    > If you like, but that is not how sales tax works. It frequently is. In many cases it goes the other way, e.g. if you buy a PC for $1000 and pay sales tax on it, and then you sell it some years later for $200, the buyer often doesn't owe sales tax because you already paid it when the PC was new. And when a business buys a product as inventory they don't pay sales tax on it, because the customer will. It's generally not a good policy to charge the same tax twice on the same product. But that's not even what we're talking about here: > My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable. My point is that it isn't doing that. You can't avoid income tax by having your employer buy you a car. The value of the car just becomes taxable income. Deferring taxes when securities are exchanged isn't doing that, because your tax basis in the new securities would be the same as it was in the original ones. You still owe the tax whenever you want to sell the securities and spend the money. Doing it this way would also allow you to get rid of a lot of the rules that really do reset the tax basis, like the one that happens to inherited property. The concern there is that property inherited through generations would have a tax basis of nearly zero, so the entire value would be taxable income and that amount of tax would make it uneconomical to ever sell the property, even if continuing to own it was highly inefficient. But if you could exchange it for another investment vehicle of equal value and just transfer the tax basis then that wouldn't be necessary and the government could continue to defer the tax obligation rather than waiving it entirely as they do now.
    - skybrian 8y ago
      The ability to delay a capital gain until death, at which point it disappears, seems like a remarkable tax dodge? I agree that it shouldn't disappear, but it seems like the fix would be to have some limits on how long a capital gains can be delayed so that they will mostly be paid in installments during a person's lifetime, rather than in a big chunk at the end. Perhaps the money should be held in escrow until a sale or death happens, much like tax withholding for wages.
      - AnthonyMouse 8y ago
        > I agree that it shouldn't disappear, but it seems like the fix would be to have some limits on how long a capital gains can be delayed so that they will mostly be paid in installments during a person's lifetime, rather than in a big chunk at the end. The problem with this is that the "capital" in many of these cases is a family business. You have some auto shop and the company owns the shop with its land and equipment, but it's all needed to continue operating the business, so you can't sell it without shutting down. Meanwhile the business only makes enough to pay the salaries of the owner-employees, who would likewise shut down the business if they weren't getting paid. So the business is worth more than the taxes it owes, but the only way to pay them would be to liquidate the assets and cease operations. The government sensibly prefers to allow the business to continue operating and collect the taxes later. But then that creates another perverse incentive. You've just graduated medical school when you inherit an auto shop. If you sell the shop and use the money to found a medical practice (or just invest it in a major ETF and go work for a hospital), you immediately lose $250K to taxes. If you continue operating the auto shop, you don't, which gives it an advantage it shouldn't have and you end up with a doctor running an auto shop. It creates too much of a preference for not selling the shop. So to solve that we reset the basis. But how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred to the medical practice or the stock purchase? (edit: basis isn't set to zero, taxable gain is zeroed out by setting basis to FMV)
        deleted 8y ago
        [deleted]
sokoloff 8y ago
> If I sell my car and buy another for the same price, should I avoid sales tax? In most states, when you sell your car and buy another in a single transaction, you do avoid sales tax on that amount. (This is common in a dealer "trade-in" scenario.)
- cheerlessbog 8y ago
  Interesting, I learned something. I did not realize this was the case in the US. Arguably a tax subsidy for dealers, since I presumably don't receive that treatment if I instead sell the car myself a week later.
  - niij 8y ago
    This applies to private sale as well within the same tax year.
  - sokoloff 8y ago
    I agree. I suspect it's also supported as an economic stimulus (which I find slightly morally repugnant, though it's undoubtedly utterly practical for government to do it).

AnthonyMouse 8y ago

> If I sell my car and buy another for the same price, should I avoid sales tax? Did the person you sold your old car to have to pay an equal amount of sales tax? Because in that case yes. > Making it possible to trade stocks without tax consequences may make it easier to better deploy capital, but it would also have a destabilizing effect, because it could make the markets more exposed to emotional reactions and poor information. This sounds like the argument a monopolist makes for why competition is bad.

cheerlessbog 8y ago
> Did the person you sold your old car to have to pay an equal amount of sales tax? Because in that case yes If you like, but that is not how sales tax works. My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable. Arguably, by selling my car, I am better deploying economic resources, as the other guy evidently had more use for it than I do. If we taxed only translation into cash, the largest fortunes would grow the most rapidly of all, as wealthy people have less use for cash, proportionally. That's arguably against the public interest. Anyway - I am not taking a position - I am observing that it is not illogical to prefer the current system.
- AnthonyMouse 8y ago
  > If you like, but that is not how sales tax works. It frequently is. In many cases it goes the other way, e.g. if you buy a PC for $1000 and pay sales tax on it, and then you sell it some years later for $200, the buyer often doesn't owe sales tax because you already paid it when the PC was new. And when a business buys a product as inventory they don't pay sales tax on it, because the customer will. It's generally not a good policy to charge the same tax twice on the same product. But that's not even what we're talking about here: > My point is that taxing economic activity that is not in cash form (such as trading shares) is not generally considered unreasonable. My point is that it isn't doing that. You can't avoid income tax by having your employer buy you a car. The value of the car just becomes taxable income. Deferring taxes when securities are exchanged isn't doing that, because your tax basis in the new securities would be the same as it was in the original ones. You still owe the tax whenever you want to sell the securities and spend the money. Doing it this way would also allow you to get rid of a lot of the rules that really do reset the tax basis, like the one that happens to inherited property. The concern there is that property inherited through generations would have a tax basis of nearly zero, so the entire value would be taxable income and that amount of tax would make it uneconomical to ever sell the property, even if continuing to own it was highly inefficient. But if you could exchange it for another investment vehicle of equal value and just transfer the tax basis then that wouldn't be necessary and the government could continue to defer the tax obligation rather than waiving it entirely as they do now.
  - skybrian 8y ago
    The ability to delay a capital gain until death, at which point it disappears, seems like a remarkable tax dodge? I agree that it shouldn't disappear, but it seems like the fix would be to have some limits on how long a capital gains can be delayed so that they will mostly be paid in installments during a person's lifetime, rather than in a big chunk at the end. Perhaps the money should be held in escrow until a sale or death happens, much like tax withholding for wages.
    - AnthonyMouse 8y ago
      > I agree that it shouldn't disappear, but it seems like the fix would be to have some limits on how long a capital gains can be delayed so that they will mostly be paid in installments during a person's lifetime, rather than in a big chunk at the end. The problem with this is that the "capital" in many of these cases is a family business. You have some auto shop and the company owns the shop with its land and equipment, but it's all needed to continue operating the business, so you can't sell it without shutting down. Meanwhile the business only makes enough to pay the salaries of the owner-employees, who would likewise shut down the business if they weren't getting paid. So the business is worth more than the taxes it owes, but the only way to pay them would be to liquidate the assets and cease operations. The government sensibly prefers to allow the business to continue operating and collect the taxes later. But then that creates another perverse incentive. You've just graduated medical school when you inherit an auto shop. If you sell the shop and use the money to found a medical practice (or just invest it in a major ETF and go work for a hospital), you immediately lose $250K to taxes. If you continue operating the auto shop, you don't, which gives it an advantage it shouldn't have and you end up with a doctor running an auto shop. It creates too much of a preference for not selling the shop. So to solve that we reset the basis. But how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred to the medical practice or the stock purchase? (edit: basis isn't set to zero, taxable gain is zeroed out by setting basis to FMV)
      - deleted 8y ago
        [deleted]

sokoloff 8y ago

> If I sell my car and buy another for the same price, should I avoid sales tax? In most states, when you sell your car and buy another in a single transaction, you do avoid sales tax on that amount. (This is common in a dealer "trade-in" scenario.)

cheerlessbog 8y ago
Interesting, I learned something. I did not realize this was the case in the US. Arguably a tax subsidy for dealers, since I presumably don't receive that treatment if I instead sell the car myself a week later.
- niij 8y ago
  This applies to private sale as well within the same tax year.
- sokoloff 8y ago
  I agree. I suspect it's also supported as an economic stimulus (which I find slightly morally repugnant, though it's undoubtedly utterly practical for government to do it).