4 ms·

You are right that it defers, but does not eliminate, taxes; however: 1. You can use losses to offset $3k of ordinary income per year. 2. Tax deferral is stil

You are right that it defers, but does not eliminate, taxes; however: 1. You can use losses to offset $3k of ordinary income per year. 2. Tax deferral is still advantageous. For example, you can defer until retirement when your tax bracket is lower, and also allow that amount to compound in the meantime. 3. If you die, your heirs get a step up in basis, so the tax is in fact ultimately avoided.

MikePlacid 4y ago
Re 2 - we are talking about stocks, they are taxed independently of your tax bracket. Tax % on stocks changes only when law changes, and this can only rise, given our current situation. Overall, the article is against tax planning, picturing it (deliberately? due to math incompetence?) as tax avoidance. You do not need to be Steve Balmer to wish to use some tax planning, ask me how I know - and I am just a software engineer.
dataflow 4y ago
For a billionaire, (1) and (2) seem basically irrelevant; if they're loopholes at all, they seem to favor the non-billionaires. That leaves us with (3), which baffles me - if the cost basis is allowed to rise without paying any taxes (?!) then isn't that the real source of the problem, rather than the wash sale? I feel like I must be missing something here - why get angry over wash sales and prohibit them if the real issue is something else entirely? Shouldn't inheritance basis step-up be the real subject of discussion?
- credit_guy 4y ago
  > if the cost basis is allowed to rise without paying any taxes (?!) It's a common misconception that the step-up in basis means the heirs don't pay taxes, and therefore the billionaires are giving us the biggest shaft. The heirs pay estate tax, and once they pay the tax, the basis resets. It would be very unfair if it didn't. However, the tax exemption for the estate tax is quite large (about $13MM for federal for 2023, but going to $7MM in 2026). For billionaires though, the estate tax exemption is negligible. The heirs end up paying estate tax for everything they inherit minus $13MM, which is nothing for them. So, again, if this benefits anyone, it's the less rich people.
  - dataflow 4y ago
    Thanks, that makes a lot more sense now. Then we go back to my initial question - where exactly is the loophole here? The tax is being deferred, not avoided entirely. Yet the article makes it seem like they somehow avoid it?
    - MikePlacid 4y ago
      They do not want to tell you: we want to close this tax planning possibility that everyone - including you - can use. So they tell you: Steve Balmer, loophole, avoidance! The original “wash sale” prohibition is pretty unfair and damaging to every single stock owner. Since it does not hold water mathematically, it’s prone to loopholes. You need to spend more time to find loopholes - so only wealthy tend to benefit from them. You want to make stock ownership more “equitable” - repel the original “wash sales” law.
- berberous 4y ago
  I agree with all of that. Hand wringing over tax loss harvesting seems silly to me. I think there are very good historical reasons for basis step-up, namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets. But since brokerages have to track basis since 2012, it would seem easy to, at least, disallow basis step-up for securities that have cost basis information held by the brokerage.
  - compsciphd 4y ago
    I've argued that heirs, if they don't have proof of the basis, should have to treat the basis as 0. Why should the basis be what it is today vs zero? It's pretty simple, if person dies on day N, and we know what we would tax the item as if he sold it on day N-1, then we should be able to know what we should be able to tax it at if sold by the heirs on day N+1. Zero would acknowledge that the heirs paid literally zero for it. conversely, if the the asset tremendously rose in value (i.e. an order of magnitude or more). then even with knowing the cost basis, one can effectively treat the cost basis as zero without significant effect on the heir (i.e. at a 33% tax rate, if it grows by an order of magnitude and you treat it as 0, instead of 10% of the current value, you only increased the amount of tax paid by 3.3% of the value). If it grows by even more than an order of magnitude, than the percentage drops (2 orders of magnitude and you are at 1/3 of a percent extra vs treating it as zero). i.e. there really isn't much of a loss to the heir if one has to treat the asset as zero cost basis. and one can always provide said cost basis in the cases where the asset growth can't be measured in even a single digit order of magnitude (but once one breaks a single digit, then there's very little loss to the heir). In general, I dislike trying to treat different assets classes differently, the rule should be no step up, track cost basis or you as the heir have to treat it as zero.
  - dataflow 4y ago
    > namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets But then can't they assume the cost basis is $0 if they can't provide documentation to back up something higher? I thought that's how it works in general when you don't have cost basis information available.
- hn_throwaway_99 4y ago
  Number 2 is definitely not irrelevant for billionaires, perhaps especially for billionaires. Deferring taxes means that your investments can achieve faster compound growth. See the "Financial Impact of Tax Deferral" section in this article, https://www.securitybenefit.com/tax-center/article/how-tax-deferral-works https://www.securitybenefit.com/tax-center/article/how-tax-d....
  - dataflow 4y ago
    Compounding isn't a magic potion that gets you infinitely wealthy though. The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M? We're worried about $10M for someone who has $85B in assets? How much of the $85B do you believe consists of compounding from that $10M?
    - hn_throwaway_99 4y ago
      I literally have no idea what you mean by your numbers. "The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M?" I don't understand this at all.
      - dataflow 4y ago
        If you're trying to take advantage of a lower retirement income bracket post-retirement, that's only valuable for < $400k of income/year. Anything after that will be at the highest bracket. Over the course of your post-retirement life that seems to come out to something on the order of $10M in tax savings. Which wouldn't really amount to much for someone with $85B in assets.
        MikePlacid 4y ago
        More than that: we are talking about stock sales. Long term sales are not part of tax brackets. 18% flat right now, until the law changes. And it can only increase, since we are now in a middle of mad deficit spending. So deferring taxes has it’s own risks.

MikePlacid 4y ago

Re 2 - we are talking about stocks, they are taxed independently of your tax bracket. Tax % on stocks changes only when law changes, and this can only rise, given our current situation. Overall, the article is against tax planning, picturing it (deliberately? due to math incompetence?) as tax avoidance. You do not need to be Steve Balmer to wish to use some tax planning, ask me how I know - and I am just a software engineer.

dataflow 4y ago

For a billionaire, (1) and (2) seem basically irrelevant; if they're loopholes at all, they seem to favor the non-billionaires. That leaves us with (3), which baffles me - if the cost basis is allowed to rise without paying any taxes (?!) then isn't that the real source of the problem, rather than the wash sale? I feel like I must be missing something here - why get angry over wash sales and prohibit them if the real issue is something else entirely? Shouldn't inheritance basis step-up be the real subject of discussion?

credit_guy 4y ago
> if the cost basis is allowed to rise without paying any taxes (?!) It's a common misconception that the step-up in basis means the heirs don't pay taxes, and therefore the billionaires are giving us the biggest shaft. The heirs pay estate tax, and once they pay the tax, the basis resets. It would be very unfair if it didn't. However, the tax exemption for the estate tax is quite large (about $13MM for federal for 2023, but going to $7MM in 2026). For billionaires though, the estate tax exemption is negligible. The heirs end up paying estate tax for everything they inherit minus $13MM, which is nothing for them. So, again, if this benefits anyone, it's the less rich people.
- dataflow 4y ago
  Thanks, that makes a lot more sense now. Then we go back to my initial question - where exactly is the loophole here? The tax is being deferred, not avoided entirely. Yet the article makes it seem like they somehow avoid it?
  - MikePlacid 4y ago
    They do not want to tell you: we want to close this tax planning possibility that everyone - including you - can use. So they tell you: Steve Balmer, loophole, avoidance! The original “wash sale” prohibition is pretty unfair and damaging to every single stock owner. Since it does not hold water mathematically, it’s prone to loopholes. You need to spend more time to find loopholes - so only wealthy tend to benefit from them. You want to make stock ownership more “equitable” - repel the original “wash sales” law.
berberous 4y ago
I agree with all of that. Hand wringing over tax loss harvesting seems silly to me. I think there are very good historical reasons for basis step-up, namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets. But since brokerages have to track basis since 2012, it would seem easy to, at least, disallow basis step-up for securities that have cost basis information held by the brokerage.
- compsciphd 4y ago
  I've argued that heirs, if they don't have proof of the basis, should have to treat the basis as 0. Why should the basis be what it is today vs zero? It's pretty simple, if person dies on day N, and we know what we would tax the item as if he sold it on day N-1, then we should be able to know what we should be able to tax it at if sold by the heirs on day N+1. Zero would acknowledge that the heirs paid literally zero for it. conversely, if the the asset tremendously rose in value (i.e. an order of magnitude or more). then even with knowing the cost basis, one can effectively treat the cost basis as zero without significant effect on the heir (i.e. at a 33% tax rate, if it grows by an order of magnitude and you treat it as 0, instead of 10% of the current value, you only increased the amount of tax paid by 3.3% of the value). If it grows by even more than an order of magnitude, than the percentage drops (2 orders of magnitude and you are at 1/3 of a percent extra vs treating it as zero). i.e. there really isn't much of a loss to the heir if one has to treat the asset as zero cost basis. and one can always provide said cost basis in the cases where the asset growth can't be measured in even a single digit order of magnitude (but once one breaks a single digit, then there's very little loss to the heir). In general, I dislike trying to treat different assets classes differently, the rule should be no step up, track cost basis or you as the heir have to treat it as zero.
- dataflow 4y ago
  > namely, that it is unreasonably hard to expect heirs to figure out basis from a deceased, especially for illiquid assets But then can't they assume the cost basis is $0 if they can't provide documentation to back up something higher? I thought that's how it works in general when you don't have cost basis information available.
hn_throwaway_99 4y ago
Number 2 is definitely not irrelevant for billionaires, perhaps especially for billionaires. Deferring taxes means that your investments can achieve faster compound growth. See the "Financial Impact of Tax Deferral" section in this article, https://www.securitybenefit.com/tax-center/article/how-tax-deferral-works https://www.securitybenefit.com/tax-center/article/how-tax-d....
- dataflow 4y ago
  Compounding isn't a magic potion that gets you infinitely wealthy though. The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M? We're worried about $10M for someone who has $85B in assets? How much of the $85B do you believe consists of compounding from that $10M?
  - hn_throwaway_99 4y ago
    I literally have no idea what you mean by your numbers. "The highest tax bracket is at < $400k. Over retirement that's a total difference of... say, $10M?" I don't understand this at all.
    - dataflow 4y ago
      If you're trying to take advantage of a lower retirement income bracket post-retirement, that's only valuable for < $400k of income/year. Anything after that will be at the highest bracket. Over the course of your post-retirement life that seems to come out to something on the order of $10M in tax savings. Which wouldn't really amount to much for someone with $85B in assets.
      - MikePlacid 4y ago
        More than that: we are talking about stock sales. Long term sales are not part of tax brackets. 18% flat right now, until the law changes. And it can only increase, since we are now in a middle of mad deficit spending. So deferring taxes has it’s own risks.