7 ms·

Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations

by TimPC 5y ago

Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations where you can end up owning a massively valued asset that you can't sell to pay the taxes on. Said asset could go to zero without you ever realizing money. I don't think people should lose their start-up stock over taxes, or face putting their entire wealth on the line on a gamble the company pays off. Keep in mind it's not unheard of to have stock worth $2+ million for an early employee in a company that goes to zero. Even more relatable to the average person: If your house price goes up too quickly you can be forced to sell to afford paying the capital gains on it.

rhino369 5y ago
No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero. You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.
- nilsbunger 5y ago
  Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes
  - rhino369 5y ago
    If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.
    - nilsbunger 5y ago
      It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan. It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.
- PaulDavisThe1st 5y ago
  You may never have future gains to match the loss. Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?
  - deleted 5y ago
    [deleted]
  - sangnoir 5y ago
    > You may never have future gains to match the loss. C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.
  - pnutjam 5y ago
    Most American's live in that system, it's called being an employee...
  - munk-a 5y ago
    I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.
mcguire 5y ago
Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.
unclewalter 5y ago
To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan. I may be missing your point though.
- yebyen 5y ago
  But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.
  - saalweachter 5y ago
    You could pin it to when loans are issued rather than their existence. That would only affect home refinancing, which will still be a considerable number of people.
  - lupire 5y ago
    That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.
- nmfisher 5y ago
  I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral. For all intents and purposes, it is income and should be taxed as such.
- koheripbal 5y ago
  I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money. Maybe they're kicking the can down the road, but that's their choice. The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax. The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.
jbay808 5y ago
I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.
- IncRnd 5y ago
  No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.
- UnpossibleJim 5y ago
  So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement? Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)
  - ljf 5y ago
    Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax. No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.
    - UnpossibleJim 5y ago
      I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.
    - jbay808 5y ago
      I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed. It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.
_archon_ 5y ago
In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.
- taeric 5y ago
  I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable. This isn't a new thing. Property taxes are the wealth tax that already exists, at large. That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes. Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.
- booblik 5y ago
  So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?
jmcqk6 5y ago
>a massively valued asset that you can't sell In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.
- tyre 5y ago
  The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.
  - 6gvONxR4sf7o 5y ago
    Aren’t 409a valuations famously gamed?
  - ardit33 5y ago
    It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.
  - lupire 5y ago
    That's the value when the valuation happens, which can be years before exercise.
HWR_14 5y ago
A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.

by TimPC 5y ago

rhino369 5y ago

No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero. You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.

nilsbunger 5y ago
Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes
- rhino369 5y ago
  If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.
  - nilsbunger 5y ago
    It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan. It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.
PaulDavisThe1st 5y ago
You may never have future gains to match the loss. Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?
- deleted 5y ago
  [deleted]
- sangnoir 5y ago
  > You may never have future gains to match the loss. C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.
- pnutjam 5y ago
  Most American's live in that system, it's called being an employee...
- munk-a 5y ago
  I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.

mcguire 5y ago

Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.

unclewalter 5y ago

To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan. I may be missing your point though.

yebyen 5y ago
But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.
- saalweachter 5y ago
  You could pin it to when loans are issued rather than their existence. That would only affect home refinancing, which will still be a considerable number of people.
- lupire 5y ago
  That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.
nmfisher 5y ago
I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral. For all intents and purposes, it is income and should be taxed as such.
koheripbal 5y ago
I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money. Maybe they're kicking the can down the road, but that's their choice. The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax. The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.

jbay808 5y ago

I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.

IncRnd 5y ago
No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.
UnpossibleJim 5y ago
So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement? Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)
- ljf 5y ago
  Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax. No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.
  - UnpossibleJim 5y ago
    I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.
  - jbay808 5y ago
    I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed. It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.

_archon_ 5y ago

In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.

taeric 5y ago
I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable. This isn't a new thing. Property taxes are the wealth tax that already exists, at large. That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes. Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.
booblik 5y ago
So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?

jmcqk6 5y ago

>a massively valued asset that you can't sell In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.

tyre 5y ago
The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.
- 6gvONxR4sf7o 5y ago
  Aren’t 409a valuations famously gamed?
- ardit33 5y ago
  It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.
- lupire 5y ago
  That's the value when the valuation happens, which can be years before exercise.

HWR_14 5y ago

A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.