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How the Wealthy Save Billions in Taxes by Skirting a Century-Old Law
- amadeuspagel 4y ago> In November 1920, a reader of The Wall Street Journal identified as R.H.T. wrote in with a question. > “I do not want to sell these stocks at the present market,” wrote R.H.T. “Would it be legal for me to sell these stocks and deduct the loss from this year’s income, even though I bought them in again the same day?” Yes, the Journal responded, the transaction was permitted under the law. A long history of attempts to patch this "loophole" follows, but the really curious thing is how this is advantageous in the first place. As far as I understand it's because the tax system was developed to tax wage income, and a system to tax investment income is kind of bolted on. With wage income it makes sense to tax it yearly and there's no concept of wage losses.
- foxyv 4y ago> Both Shell and BHP offered two different versions of their common stock. For each company, the two stocks were legally distinct, but they performed very similarly because, after all, they were shares in the same company. Sneaky snakes! So they are wash selling without really selling anything so they can harvest the maximum tax losses every year without actually making any sales. There are lies, dang lies, and tax accountancy...
- MikePlacid 4y ago“Wash sale” prohibition is mathematically absurd. “Two different versions of a common stock” is just a mathematical proof of the absurdity.
- ravivooda 4y agoSlightly different tangent but people do this with ETFs all the time. I built a tool that shows potential swaps to harvest losses for taxes but keep similar exposure. Checkout taxlossharvestingtool.com
- Maursault 4y agoIf a multi-billionaire hates taxes so much, why not just stop making money? I don't understand why avarice is so important when you have more money than can be spent in two lifetimes. Taxes are a portion of income and generally are not more than annual income. As long as there is a net gain, even if it is smaller than it would be tax-free, why not be a good guy instead of an asshole? We really need to make it astoundingly unprofitable for billionaires to skirt taxes because its billionaires driving up everyone else's taxes. If cops can seize over 50K asset forfeitures every year from non-billionaires and non-millionaires and non hundred-thousandaires, then surely we can tolerate seizing nearly all of the merely the top 50 billionaires' wealth, and leave them with a token $200M each to scrape-by. Please stop voting for candidates that are members of the party that's primary purpose is to prop up the uber rich and make them richer, faster, at the expense of everyone else. The 2nd Amendment isn't ever going anywhere, and you will never, never ever advance economically voting against your personal economic interests. If everyone voted only in their personal economic interests, employment would skyrocket, crime and poverty would plummet, and the economy would boom. The uber rich aren't stupid with their votes, 99.9% of the other members of their party are.
- atonse 4y agoThe same kinds of people that aren't satisfied with making $5m, and want $50m, or $500m, or $5bn, can't psychologically fathom letting go of a single penny to anyone else, whether it's their competitors or the government. That's the problem. To many of them it's a score.
- MikePlacid 4y ago
- downvoteme1 4y agoTLDR - by using tax loss harvesting . At the end of the year, sell your stocks which are down and then buy them back. Then you can use the losses to offset the gains. Although this is also available to masses .
- chii 4y agoIn some jurisdictions (such as Australia), this is called a wash sale, and is illegal.
- ojbyrne 4y agoThe entire article is about wash sales, basically describing ways to circumvent the rules.
- merek 4y agoThe IRS will also reject the reported loss if it qualifies as a wash sale. > You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. https://www.irs.gov/pub/irs-pdf/p550.pdf https://www.irs.gov/pub/irs-pdf/p550.pdf
- klyrs 4y ago> Although this is also available to masses . Not in any meaningful sense. Only the ultra-wealthy can wipe out the lion's share of their tax bill through this loophole. From the article: > Someone like Ballmer can easily deploy $100 million in losses to cancel out a $100 million gain from selling some of his vast Microsoft holdings. It’s a very different story when it comes to wages and other forms of income, of which only $3,000 can be offset. On average, only the top 0.001% of taxpayers made a majority of their income through investment gains in 2018, according to public IRS data.
- foxyv 4y agoBetterment lets you do it through their pseudo index fund.
- bmitc 4y agoQuit taxing the ultra wealthy as if they're some regular joe pulling a yearly salary or hourly wages. Their wealth game is different, so tax them differently.
- rekabis 4y agoI have been talking of a Net Worth tax for some time now. Start at a value that is truly eye-watering for your average citizen, one which the lower-99% will never reach in their lifetimes. Say, for argument, $10M. Implement an algorithm that plots out a Sigmoid Curve - 0% taxation at $10M, and increasing slowly at the beginning. Once it gets close to the inflection point, it rises rapidly to over 80% taxation, at which point it then slows down again, reaching 100% taxation for everything above the maximum value. Which would be set at something truly ridiculously high - say, $100M. That way, we have a smooth curve that cannot be “gamed” anywhere as easily as abrupt taxation levels. And we use simpler, market-valued assets from anywhere in the world that focus on how the hyper-wealthy sock away their wealth. As such, any sort of classic investment is most definitely on the table, especially if it is ever valued by an open market. Housing, land, gold, stocks, bonds, business partnerships, you name it. All on board for taxation. The nice thing about Sigmoid curves in a taxation role is that they start off incredibly gentle - you will likely not may much tax at all until you hit $25M of net worth, because it’s paid progressively on any amount above $10M. But at the same time, you pay 100% taxation on any net worth above $100M. It is truly a progressive tax, leaving plenty of room for the ambitious, but is punishingly draconian on the vampiristically greedy.
- hervature 4y agoYour whole comment just shows how little you understand about the problem. The problem is not that governments do not know what a "Sigmoid Curve" is. The problem entirely lies in "Net Worth tax". How do you determine net worth? With all the different types of corporations out there, you just move your net worth into an entity that you do not "own". Just like how my work laptop is not mine. If your conclusion is to tax businesses on net worth, that would be easily skirted with international boundaries and drastically lower business creation.
- dataflow 4y agoI don't really understand how this works. So you buy stocks A and B in identical amounts, and A increases by the same amount that B drops. You need cash, so you sell A, but you don't want to pay taxes on the gains on A, so you trade B to offset the losses. But that lowers B's cost basis, so the next time it rises, you'll have more of a tax liability than you did earlier, right? Whereas if you didn't trade B, you'd have avoided that difference. I feel like I'm not thinking it through sufficiently - how does repeating this process end up being a net benefit for you? Update/summary for those reading: The answer seems to be (if I understand the comments below correctly) that inherited assets' cost bases magically get stepped up to their fair market value without tax consequences, which would explain why kicking the can down the road is beneficial, as well as one reason why generational wealth is such an incredibly impactful loophole.
- theGnuMe 4y agoIf you read the article it is straightforward. Companies have two securities that are "legally distinct" and you sell one for the tax loss and buy the other to keep your position.
- dataflow 4y agoMy question was not about the tactic but about the strategy.
- twalla 4y agoIt's more like this: stock A offers exposure to X (say resource extraction, pharma, tech, small cap growth.. whatever). Stock A also went down in value this tax year but you're still confident in your investment thesis, so you find stock B, which also has similar exposure, this could be a different ETF, a different company or even a different class of shares in the same company (sell GOOG buy GOOGL). You sell A to create a loss on paper and purchase B with your proceeds. This allows you to create paper losses to offset your tax liability from any sales that produced capital gains while keeping, roughly, the same allocation without violating the wash sale rule.
- 4y ago
- exabrial 4y agoGood for them. The only thing that upsets me is that this technique is not available for everyone. Watching the us government fire a $150k missile from a $170m fighter that costs $25k/hour to fly at a $250 balloon ticks me off. That’s my money. It was taken from me unwillingly and transferred to to some elite 1% senator’s golf Buddy. Taxes are stupid and we need to move past them if we’re ever to advance as a civilization.
- carlosjobim 4y agoYou are among the very few who broke free. But you cannot help those who don't want to be helped, they belong to the system.
- lostlogin 4y agoI’m missing the key part of this, how would things get paid for?
- carlosjobim 4y agoMaybe everybody can start paying for their things themselves instead of forcing others?
- lostlogin 4y agoHave you an example of a system like this working somewhere?
- carlosjobim 4y agoOf course not, because that wouldn't be a system.
- notch898a 4y agoVoluntary transactions and/or illegitimate violence.
- quickthrower2 4y ago
- refurb 4y agoI know plenty of middle-class people using this technique as well, it's commonly called "tax loss harvesting". Close the "loophole" (not a loophole, it's just following the law as written) and it'll impact way more than just the wealthy.
- quickthrower2 4y agoIn australia they could say this makes you a professional trader and now it is all subject to income tax and more scrutiny.
- SamReidHughes 4y agoThe article's specifically talking about switching between nearly identical securities. Tax loss harvesting is more general.
- refurb 4y agoIts done the same way. You swap one security for another, almost identical one and take the capital loss.
- SamReidHughes 4y agoRight; I'm saying, many people tax loss harvest, most don't swap back in the same day to an alternate share class on the same company.
- jjeaff 4y agoI would wager it would affect middle class significantly less as a percentage of their total net worth than the wealthy. Considering that most middle class wealth is in their primary residence and not the stock market. I'm sure closing the loophole could be easily offset for then by slightly lowering income tax on the lower brackets.
- monero-xmr 4y ago$100 million tax bill -> move $100 million into Donor Advised Fund -> open family foundation and hire yourself / kids / friends at ~$500k per year leadership roles -> DAF moves $100 million into the family foundation -> money back to self, host galas / high society events, enjoy life
- quickthrower2 4y agoIs this legal?
- monero-xmr 4y agoYes
- donmcronald 4y agoIf you have to ask, you can’t afford it. Lol.
- quickthrower2 4y agoI definitely can’t afford that!
- compsciphd 4y agoanyone who owns stocks should consider using a DAF. The only people who shouldn't consider using a DAF are the people who either dont own stocks or never give charity.
- jjeaff 4y agoYes, but if you have a $100m tax bill, you would need to donate more than that to offset the taxes. Assuming a 33% tax rate, you would need to put $300m into a foundation to zero out $100m in taxes.
- UIUC_06 4y agoDAF and "family foundation" are two alternate things. The latter is much more lawyer-intensive.
- quickthrower2 4y agoTax capital gains the same as income. Tax on unrealised gains (minus losses). Tax quarterly. Then this problem goes away. But the rich wont vote for that!
- NotYourLawyer 4y agoTaxing unrealized gains is unworkable.
- quickthrower2 4y agoPolitically maybe but not practically. What are property taxes? Effectively this but for a specific asset. Granted they are not based in the rise in value. But the idea of paying tax for holding something is not new.
- SamReidHughes 4y agoProperty taxes are consumption taxes. Taxing stock ownership is a tax on investing.
- quickthrower2 4y agoI am talking about taxes paid yearly per property by the owner even it they don’t occupy the property
- SamReidHughes 4y agoThey are still consuming those property-hours.
- heleninboodler 4y agoChanging the definition of what constitutes "realizing" a gain is workable, however. For example, if you put $50M in stock as collateral against a loan to buy your yacht, you are very explicitly "realizing" the value of that, both by getting multiple parties to agree on its value and put it on record in a federally-regulated transaction (realizing in the sense of "making the value real"), and by actually getting a corresponding wad of cash out of it (realizing in the sense of "reaping the benefit"). Using the fact that it hasn't actually been "sold" as the basis of a claim that its value is "unrealized" should be recognized as the tax dodge it is.
- SamReidHughes 4y agoThe title is a lie. They just defer taxation to a later year. What tax harvesting moves like this get you is better compounding, and the result is, you pay more taxes (on more gains) later.
- tsimionescu 4y agoNot if you keep doing it until the day you die.
- gamblor956 4y agoWash selling, add this strategy is known, is not actually legal in the U.S. Years ago at a firm, I had a client they to convince us to do this for them. The partner told them they weren't paying us enough for him to risk the prison time. And yes, if you get caught, you still pay penalties, and interest, and if the amount is large enough you can look forward to a taxpayer paid vacation to a minimum security federal penitentiary.
- hn_throwaway_99 4y agoYou should read the article.
- gamblor956 4y agoI did read the article. The entire article is about wash trading. The thing about tax is that "strategies" like this which are clearly contrary to the intent of the law but which technically fall within the letter of the regulations can be made explicitly illegal after the fact, so the lack of prosecutions to date is not an indicator of their illegality. See the Bermuda loss harvesting scandal from the early 2010s. Goldman's partners are simply banking on being able to place enough former employees in the regulatory agencies to get away with it this time. It didn't work for the Bermudan loss harvesting schemes and it probably won't work this time.
- hn_throwaway_99 4y agoThe whole point, though, is that tax-loss harvesting is perfectly legal, so why is it fair to move the goalposts as to what counts as a wash sale? As the article states, "But well-tuned software could easily find the right stocks to keep the accounts tracking the market." So the law says you can't sell A and buy A back immediately and count it as a loss, but it says nothing against selling A and buying back B that happens to be strongly correlated with A. I'd argue that isn't even against the intent of the law (or at the very least this law is so poorly thought through that its intent is ambiguous).
- occamrazor 4y agoWhy not tax, at least for publicly traded stocks, the unrealized capital gains? (taking e.g. the last price of the year as basis) In addition to the problem mentioned in the OP, this would also solve taxation for buybacks.
- jross225 4y agoIn addition to being a highly volatile source of revenue to the government, you would have to give tax breaks for unrealized capital losses out of fairness; which would introduce a ton of complexity.
- occamrazor 4y agoYes, tax would be paid on the net capital gain for the year. If negative, it can be carried forward to the next year, without limitations. I don’t know if offsetting non-capital income with capital losses should be allowed. My intuition says no, but who knows.
- compsciphd 4y agothe US government already effectively does this to foreign resident citizens who buy PFICs (and why us citizens are strongly encouraged not to buy PFICs). the reason its problematic is that just because a persons assets have risen, doesnt mean they want to sell, and if they dont sell, it means they need the liquid assets to cover said tax bill. a tax of this nature forces people to sell assets which is problematic. Its not problematic to say you sold X assets at profit Y, its your responsibility to retain percentage Z of that to pay the taxes.
- occamrazor 4y agoThat’s why I suggested public companies only. Their stocks can be easily sold at any time.