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one reason other replies haven't mentioned is that long-term gains don't play well with a progressive income tax system. imagine you make $35k salary and you m

one reason other replies haven't mentioned is that long-term gains don't play well with a progressive income tax system. imagine you make $35k salary and you make an investment that increases in value by $50k over ten years. we'll ignore inflation and tax bracket hikes for simplicity. assuming you live in the US, your salary places you in the 12% bracket, and the 22% bracket starts around $40k income. if you realize that gain in the last year and it counts as income, almost all of that $50k gets taxed at 22%, despite the fact that "on average" you only made $40k each year. this effect gets worse the longer you hold onto the asset.

Traster 7y ago
Why not simply apply the gain over the time period. If you get $50k gain after 10 years, that's counted as $5k gain per year and we already know what tax bracket you were in for those years so you submit a revision and pay the tax that would've been due in each of those years.
- leetcrew 7y ago
  that would be a reasonable solution. I wouldn't oppose it if it came with a slight cut to income tax rates.
unlinked_dll 7y ago
A few replies. First, I don't believe this is actually an issue for people with 35k salaries as a whole. The vast majority of Americans do not have savings in excess of $1k let alone the ability to make an investment in the ballpark you're talking about. Secondly, if this is true - why is the "long term" tax capped at 1 year? And not 10? Or adjusted for the length of an investment? To me the answer is because it's not designed to fix this problem.
- leetcrew 7y ago
  it's a contrived example to make the math easy. you can get the same outcome with more realistic values by putting the income closer to $40k and decreasing the gain, or you could do the analysis at a higher tax bracket boundary. my point is that it doesn't make sense to naively tax gains as if they were income acquired in a single year. I'm not arguing for/against the specific implementation of cap gains we currently have.

Traster 7y ago

Why not simply apply the gain over the time period. If you get $50k gain after 10 years, that's counted as $5k gain per year and we already know what tax bracket you were in for those years so you submit a revision and pay the tax that would've been due in each of those years.

leetcrew 7y ago
that would be a reasonable solution. I wouldn't oppose it if it came with a slight cut to income tax rates.

unlinked_dll 7y ago

A few replies. First, I don't believe this is actually an issue for people with 35k salaries as a whole. The vast majority of Americans do not have savings in excess of $1k let alone the ability to make an investment in the ballpark you're talking about. Secondly, if this is true - why is the "long term" tax capped at 1 year? And not 10? Or adjusted for the length of an investment? To me the answer is because it's not designed to fix this problem.

leetcrew 7y ago
it's a contrived example to make the math easy. you can get the same outcome with more realistic values by putting the income closer to $40k and decreasing the gain, or you could do the analysis at a higher tax bracket boundary. my point is that it doesn't make sense to naively tax gains as if they were income acquired in a single year. I'm not arguing for/against the specific implementation of cap gains we currently have.