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.
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.