Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower.
This obviously creates a situation where people will do their best to make their trading fall into the later category.
What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains.
The IRS has called shenanigans on this and the below quote is probably the biggest reason why:
> "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."
The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions.
I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock?
It's even the same word: A retail business sells its stock (product), and sells it's stock (shares)
Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)
The difference is the people who make the tax rules want to encourage one kind of behavior over another, regardless of anything else. You're free to think that's a fundamentally bad idea, but it isn't "arbitrary," it's the basic idea of Behavioral Economics.
They could have done that much better with linear interpolation instead of a step function.
Today's step function, with made-up tax percentages:
20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute.
My proposal, with interpolation:
20% if held for less than 6 months
10% if held for 18 months or more
Between 6 and 18 months, we interpolate between 20 and 10%.
The difference between waiting 364 or 365 days is now minimum. I chose 6 and 18 because they're 12 +/- 6. However, a different curve could be drawn. The idea is to replace the step with a gradual increase.
That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.
Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?
I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.
> Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?
I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B.
Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive.
Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held".
[1] At least, I think I read they were required to start tracking this.
You have to assume that the brokerage must retain and report the information, otherwise you can lie all you want about your cost basis without any way for the IRS to cross check at scale. If caught in an audit, you can just claim a bookkeeping error; probably not what they want given the lengths they've gone to in order to fill common holes (c.f. the whole "provide a 1099 to pretty much everyone you have a financial relationship with" pile of bullshit).
Your stock broker or investment manager should be doing all this for you. Normally you receive end of year tax documents and all you do is copy some numbers from them onto your tax return. It's pretty easy but it could definitely be even more automated.
Maybe some stock brokers or weird investments don't do this?
If you've held a position for long enough it may have been purchased before brokers were required to keep track. Your broker may not have enough information to provide the cost basis.
I have a couple small positions I've held for more than 20 years now. At this point it will be more trouble to deal with the taxes than they're worth, so I'll probably just hold onto them and let my heirs deal with it.
There are probably thousands of laws on the books that would be written differently now that we have software running everything. No sense in writing laws for the world of 20 years ago.
Well, just to caveat, not everyone who makes the rules is a pigouvian. Some arguments over taxes are actually about finding ways to maximize revenue while minimizing distortions. It's a mix.
> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality.
Trading an asset vs. holding it is a non-fictional concept very much grounded in reality.
Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.
Financial instruments come in a variety of flavors the tax treatment is definitely arbitrary and not possible to be very consistent or logical about.
1- Over the course of a year I buy and sell hundres of stock issues, constantly incuring taxable events, and at the end I sell off the entire portfolio including short term cap gains rate (same as income rates).
2- I buy an ETF that does all the same trades, but when I sell I only get long term cap gains taxes.
3- I loan a company money (sell an note) to do this trading and a clause written for at the end of the year call the note for a value equal to the previous two scenarios. I incure taxation from a bond investment,
4- I buy an ETN (exchange traded note) that repays based on a formula as if the previous trades were made. Once again I pay long term capital gains on an equity investment.
5- I buy a future on the index I'm managing and invest an an amount equal to current price of the stocks in bonds to replicate the price performance on the ETN. When I sell a year, I incure two taxable events.
6- I have't even brought up options, so I can keep going.
These are all the same, but they all have different taxable events and consider a realized gain something different.
I think people are getting tripped up on the difference between "fictional" and...I dunno..."fungible"? In a sense all money is fictional, but obviously despite that no one is willing to trade a $10 bill for my $1 bill. So taxing people differently for having $10 vs $1 might make sense.
But $10 and ten $1 bills are equivalent. A tax that applied to one and not the other would be very weird; it's not clear what behavior it's meant to encourage, and anyway lots of people would avoid paying it.
So the argument above is that "realizing" gains is a lot like getting change for a dollar bill. I don't know whether that's right, but anyway it's different from arguing about whether money is real :)
There is nothing fictional about the ownership of a fraction of a profitable enterprise. This shouldn't be more difficult than the concept of negative numbers, or any other useful non-physical concept. Ditto for options or any other construct that has a mathematical or market-based value.
The fiction is to believe that 'a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people' is an entity.
You're basically saying that contracts are fictional. Try entering into a contract, then behaving as if it's fictional by ignoring your responsibilities in the contract, and you will quickly find out how real they are.
>You're basically saying that contracts are fictional.
Nope (although, that may be true, in some sense), I am not saying that. I am saying the thing many refer to as an 'entity', as in, 'the corporate entity', is a fictional thing. It has no real, inherent or independent physical existence apart from the people that choose to represent it.
There's no fundamental difference between a corporate entity and a contract. Just because it has no physical manifestation doesn't mean it's a fiction.
All 'assets' that are traded are not necessarily part ownership of a company. Some are pure voting rights. Some are rights to dividends. Some are rights to loan payments.
To believe that all assets are 'part ownership of a company' is not only naive, but incorrect and delusional.
Stockholders who hold less than a year are going to have very different goals for the company than those who hold for several years. That's the difference.
The contraction “it’s” means either “it has” or “it is”. So, the quoted expression expands either way to a syntactically malformed expression with two verbs.
A fairer way to resolve this might be letting Renaissance pay the long-term while Deutsche pays at least the difference between the short-term and the long-term rates. If Deutsche Bank wants to pay Renaissance's taxes for the latter, that's fine by me.
http://www.bloomberg.com/news/articles/2014-07-21/renaissanc...
Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower.
This obviously creates a situation where people will do their best to make their trading fall into the later category.
What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains.
The IRS has called shenanigans on this and the below quote is probably the biggest reason why:
> "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."