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My understanding is that you can play tricks with stocks so that you don't really need to realize the gains to benefit from them. They can be used as collateral

My understanding is that you can play tricks with stocks so that you don't really need to realize the gains to benefit from them. They can be used as collateral for loans, directly donated to charities (lowers down your tax bill w/o forcing you to realize the gain), there's also the step-up basis loophole (or was it already closed?). I may be missing some details (and other creative ways to do "tax optimization") though, I'm not a CPA.

lesam 4y ago
I never see anyone complaining about buybacks because of tax reasons though. In particular, the author is complaining companies are not spending enough on R&D because of buybacks. It is true that buybacks are more tax efficient than dividends, which is why companies generally do buybacks instead of dividends. The US tax on capital gains is definitely a mess though.
- bialpio 4y ago
  I was mostly responding to the "but they can't be spent either" part. From my perspective there isn't that much difference if a company is doing a buyback vs a dividend, as long as it's sharing its profits with the investors (w/o that, I view the stock market as a legal Ponzi scheme); I'm not really commenting on how much money should transfer to the shareholders though.
s1artibartfast 4y ago
I had not heard about the donating to charity. Very interesting and tax efficient, but worth noting that you cant make money with it (you are still donating far more than you are saving in taxes).
- toss892625 4y ago
  In high-tax states, where Federal + State taxes exceed 50%, it is now possible (but rare!) to 'make money' by donating. Let's take someone with a 53% marginal income tax, living in NYC. The person has stock with a basis of $0.0 with a current value of $10, and has held the stock for less than a year (short term capital gains = ordinary income rates). Separately, they have $1,000,000 of income. Scenario 1) Donating the stock would produce a $10 tax deduction, worth $5.3. Scenario 2) Selling the stock would produce $10 of returns - $5.3 in income tax = $4.7 In this scenario, donating the stock produces higher returns compared selling the stock. It's a fairly obtuse scenario, since it's rare for the cost-basis to be so low, time-span to be so short, and to have a good use for a tax deduction. It becomes much more likely when a completely illiquid & price inflated stock is donated. If a large chunk of illiquid stock is sold, it'll crash. But donating an inflated chunk of stock would lock in the tax deduction. Donating shares of a stock when a person knows insider information is called 'insider giving', and is highly prevalent & largely unenforced. https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i....
- Qwertious 4y ago
  Charities aren't necessarily "charitable" - they can be political and affect businesses. And in the dodgiest situations, they can be something you financially benefit from. Obviously the latter leans towards tax evasion, but that's exactly the point - stock buybacks aren't necessarily tax evasion but they can certainly assist in it.
- bialpio 4y ago
  Just set up your own charity that pays for your charity-related travel - it's not your fault that the charity focuses on work in a region where you happen to have a summer home. ;- )

lesam 4y ago

I never see anyone complaining about buybacks because of tax reasons though. In particular, the author is complaining companies are not spending enough on R&D because of buybacks. It is true that buybacks are more tax efficient than dividends, which is why companies generally do buybacks instead of dividends. The US tax on capital gains is definitely a mess though.

bialpio 4y ago
I was mostly responding to the "but they can't be spent either" part. From my perspective there isn't that much difference if a company is doing a buyback vs a dividend, as long as it's sharing its profits with the investors (w/o that, I view the stock market as a legal Ponzi scheme); I'm not really commenting on how much money should transfer to the shareholders though.

s1artibartfast 4y ago

I had not heard about the donating to charity. Very interesting and tax efficient, but worth noting that you cant make money with it (you are still donating far more than you are saving in taxes).

toss892625 4y ago
In high-tax states, where Federal + State taxes exceed 50%, it is now possible (but rare!) to 'make money' by donating. Let's take someone with a 53% marginal income tax, living in NYC. The person has stock with a basis of $0.0 with a current value of $10, and has held the stock for less than a year (short term capital gains = ordinary income rates). Separately, they have $1,000,000 of income. Scenario 1) Donating the stock would produce a $10 tax deduction, worth $5.3. Scenario 2) Selling the stock would produce $10 of returns - $5.3 in income tax = $4.7 In this scenario, donating the stock produces higher returns compared selling the stock. It's a fairly obtuse scenario, since it's rare for the cost-basis to be so low, time-span to be so short, and to have a good use for a tax deduction. It becomes much more likely when a completely illiquid & price inflated stock is donated. If a large chunk of illiquid stock is sold, it'll crash. But donating an inflated chunk of stock would lock in the tax deduction. Donating shares of a stock when a person knows insider information is called 'insider giving', and is highly prevalent & largely unenforced. https://dlj.law.duke.edu/article/insider-giving-avci-vol71-iss3/ https://dlj.law.duke.edu/article/insider-giving-avci-vol71-i....
Qwertious 4y ago
Charities aren't necessarily "charitable" - they can be political and affect businesses. And in the dodgiest situations, they can be something you financially benefit from. Obviously the latter leans towards tax evasion, but that's exactly the point - stock buybacks aren't necessarily tax evasion but they can certainly assist in it.
bialpio 4y ago
Just set up your own charity that pays for your charity-related travel - it's not your fault that the charity focuses on work in a region where you happen to have a summer home. ;- )