4 ms·

As I see it, the real problem is differentiating "income" and "capital gains". We all have a general sense of what each category refers to, but there are a lot

by runeks 12y ago

As I see it, the real problem is differentiating "income" and "capital gains". We all have a general sense of what each category refers to, but there are a lot of edge cases where it's difficult to say whether it's one or the other. If I'm a day-trader, buying and selling stocks, and making a living on this, is the profit income or capital gains? If we go by the logic that one shouldn't pay the same tax twice, then it's capital gains, because income tax has already been paid on the money used to invest. I'm not saying this is the wrong conclusion -- that the income of day-traders selling and buying stocks should be taxed as capital gains -- but it seems to me that this constitutes favoring one profession over another. Surely, if I earn my living buying apples cheaply and selling them for more money, my income would be taxed as income, and not capital gains. So why should income from selling and buying apples be taxed differently than income from selling and buying stocks? Again, I don't claim to have the answer. It just seems like a hard problem to me.

gamblor956 12y ago
If I'm a day-trader, buying and selling stocks, and making a living on this, is the profit income or capital gains? This is not an edge case; it's a well-settled point of law. Capital gains are related to the disposition of assets intended to be held for investment. Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Ergo, the sales of apples results in normal income. (Note that for stockbrokers, stocks are also treated as inventory because by definition they are not in the business of holding stocks for investment.) Buying and selling stocks as a day trader is not the type of capital trading that governments want to incentivize, so they treat income arising from this type of activity as "short term capital gains." In most countries, including the US, short term capital gains are taxed at the same rates as normal income, which is the scenario that would apply to your day traders. Consequently, the day traders and apple sellers are taxed in essentially the same manner. It is only if capital assets are held for a sufficiently long period of time (in most countries 1 year, though in some countries as little as 6 months) that the true capital gains rates apply. This is where the day traders may come out ahead--if they hold on to some of the stocks traded for at least 1 year.
- runeks 12y ago
  > Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Wheat is also intended for consumption, but it -- as with many other goods, consumable or not -- is also a commodity that is traded. I realize I may have pointed out some edge cases that weren't actually edge cases. I am not a tax attorney, so I don't know what the law says. I am only trying to point out that determining what is income and what is a capital gain is a hard problem, even though laws exist that try to put various activities into one of the two categories. The US uses an arbitrary 1-year limit, while the tax code of my country of residence (Denmark) says the tax rate is determined, not by how long the assets are held, but by trying to determine whether the profit constitutes ones primary source of income. If the answer is "yes", it's taxed as income. So different countries use different methods to solve this problem of discerning income and capital gains, but I still maintain that it's a hard problem, that has not been solved adequately anywhere. And that there are many edge cases, resulting from current law, that are counter-intuitive.
ISL 12y ago
A day trader pays short-term capital gains, which are taxed at income rates. Long-term capital gains kick in after the asset has been held more than a year. I'm not certain, but I think that the long-term rates could apply if you held your apples for more than a year.

by runeks 12y ago

gamblor956 12y ago

If I'm a day-trader, buying and selling stocks, and making a living on this, is the profit income or capital gains? This is not an edge case; it's a well-settled point of law. Capital gains are related to the disposition of assets intended to be held for investment. Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Ergo, the sales of apples results in normal income. (Note that for stockbrokers, stocks are also treated as inventory because by definition they are not in the business of holding stocks for investment.) Buying and selling stocks as a day trader is not the type of capital trading that governments want to incentivize, so they treat income arising from this type of activity as "short term capital gains." In most countries, including the US, short term capital gains are taxed at the same rates as normal income, which is the scenario that would apply to your day traders. Consequently, the day traders and apple sellers are taxed in essentially the same manner. It is only if capital assets are held for a sufficiently long period of time (in most countries 1 year, though in some countries as little as 6 months) that the true capital gains rates apply. This is where the day traders may come out ahead--if they hold on to some of the stocks traded for at least 1 year.

runeks 12y ago
> Stocks are generally such assets and the disposition of stocks results in capital gain income (or capital losses). Apples are not intended for investment; they are intended for consumption. Wheat is also intended for consumption, but it -- as with many other goods, consumable or not -- is also a commodity that is traded. I realize I may have pointed out some edge cases that weren't actually edge cases. I am not a tax attorney, so I don't know what the law says. I am only trying to point out that determining what is income and what is a capital gain is a hard problem, even though laws exist that try to put various activities into one of the two categories. The US uses an arbitrary 1-year limit, while the tax code of my country of residence (Denmark) says the tax rate is determined, not by how long the assets are held, but by trying to determine whether the profit constitutes ones primary source of income. If the answer is "yes", it's taxed as income. So different countries use different methods to solve this problem of discerning income and capital gains, but I still maintain that it's a hard problem, that has not been solved adequately anywhere. And that there are many edge cases, resulting from current law, that are counter-intuitive.

ISL 12y ago

A day trader pays short-term capital gains, which are taxed at income rates. Long-term capital gains kick in after the asset has been held more than a year. I'm not certain, but I think that the long-term rates could apply if you held your apples for more than a year.