Would you support this type of change for taxing capital gains?

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Would you support the proposed change in capital gains?

  • Yes

  • No

  • I don't know

  • Yes, with some tweaks


Results are only viewable after voting.

Exterous

Super Moderator
Jun 20, 2006
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3,426
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2) Inherited stocks never pay capital gains

This is not entirely true. Certain types of trusts do not get a step up basis on the death of the parent so the inheritor is responsible for paying tax on any non-offset gains.

That said I do agree that there are some other areas that probably deserve some attention - like carried interest
 

dullard

Elite Member
May 21, 2001
24,998
3,326
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This is not entirely true. Certain types of trusts do not get a step up basis on the death of the parent so the inheritor is responsible for paying tax on any non-offset gains.
I've edited it to say "often don't pay capital gains". Thanks for the clarification. But for the vast majority of us without trusts and the like, when we die, our heirs get a free step-up in cost basis on many taxable investments and that income goes tax free.
 

glenn1

Lifer
Sep 6, 2000
25,383
1,013
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2) Inherited stocks often don't pay capital gains.

Example, buy $100 in stocks, let it appreciate to $1000. When you die, the government treats your heirs as if they paid $1000 for the stocks when they sell it. They gain the $900 tax free forever. Neither you nor your heirs ever pays any tax at all on the $900 gain.

Note: estate taxes do eventually kick in, but this loophole basically offsets much of it.

You basically are subject to one tax or the other, there isn't any "free money" involved. If your parent dies and you sell his stock X you as the beneficiary who receives those proceeds are subject to capital gains on them. If your parent dies and you don't sell his stock X, then the value of the stock at the time of death ("stepped up basis") is subject to Estate Tax.

Admittedly there is relatively high estate tax exemption ($5.43 million in 2015) but that's a different issue and if that's your concern you should advocate that limit be lowered. To me it makes little sense to force every beneficiary to sell stock from an estate just to capture the Capital Gains tax when that stock sale may be unwise, poorly timed, or impractical to liquidate.
 

Cozarkian

Golden Member
Feb 2, 2012
1,352
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When you go into this math, it is easiest to assume the donor has a donation amount in mind ($1000 will be donated in 2016) for example. This helps compare apples to apples. I can't honestly imagine a donor donating only $100 if they had stocks but $1000 if the money was in the bank for example. When I donate to charity, I know how much money I want to donate and then look at what stock has gained the most (percentage wise) and donate enough shares of that stock to meet my dollar goal. Then I rebuy the same stock that day with cash so my portfolio balance isn't out-of-whack. Saves me a ton of money on taxes, I donate the same amount as I would otherwise, and my investments have a net zero change (other than the $100 basis becomes a $1000 basis in this example).

Also, at least in the cases that I've donated stocks, they have been sold in the donation process. For example, Vanguard has lengthy set of forms to accept donated stocks, the charity must meet Vanguard's minimum investments, the charity might have investments at another investment firm, the stock might not fit the charity's vision (like steak-house restaurant stock being donated to PETA), the stock might not fit the charity's portfolio needs, etc. They can go through all of those hassles, or check the "sell the stock and give the cash to the charity" box. I assume most charities take the cash-out option. Then they can use or invest it as they need.

I'm not opposed to an option C. But I do think that $900 should be taxed in some way, shape, or form.

You are right. The math should probably be done based on the value of the target donation. With that in mind, option (B) is the best, because it has the same tax consequences whether a donation is made in cash or appreciated stock.

Option A penalizes stock donations and option C slightly favors stock donations (it substantially reduced but doesn't close the loophole).

The stock might be sold during the process, but option A and C have different tax outcomes depending on whether the stock is technically sold before or after the transfer.
 

Darwin333

Lifer
Dec 11, 2006
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isnt the average time a stock is held something crazy like 5 seconds? I'd support taxing all income the same, creating new higher taxbrackets in the million+ range, and adding a transaction tax to stock trades.

That's due to a very few huge companies (like Goldman) and their high frequency trading which is often literally fraud. Basically they get to scam a few pennies a share from the people who originally intended to buy the stock through unfair price discovery and manipulation, among other things...
 

Exterous

Super Moderator
Jun 20, 2006
20,348
3,426
126
I've edited it to say "often don't pay capital gains". Thanks for the clarification. But for the vast majority of us without trusts and the like, when we die, our heirs get a free step-up in cost basis on many taxable investments and that income goes tax free.

Agreed that its not a typical situation

To me it makes little sense to force every beneficiary to sell stock from an estate just to capture the Capital Gains tax when that stock sale may be unwise, poorly timed, or impractical to liquidate.

Unusual legal squabbles aside I do not believe its common to force the sale of stocks - just that the basis for determining final Long Term gains is changed.
 

dullard

Elite Member
May 21, 2001
24,998
3,326
126
You basically are subject to one tax or the other, there isn't any "free money" involved. If your parent dies and you sell his stock X you as the beneficiary who receives those proceeds are subject to capital gains on them. If your parent dies and you don't sell his stock X, then the value of the stock at the time of death ("stepped up basis") is subject to Estate Tax.

Admittedly there is relatively high estate tax exemption ($5.43 million in 2015) but that's a different issue and if that's your concern you should advocate that limit be lowered. To me it makes little sense to force every beneficiary to sell stock from an estate just to capture the Capital Gains tax when that stock sale may be unwise, poorly timed, or impractical to liquidate.
There is no forcing to sell. If I buy a stock for $100, it appreciates to $1000 and you inherit the stock from me, you don't have to sell it. You wouldn't have to pay capital gains at that time either. But I see no reason that your cost basis should be $1000. It should be the same $100 cost basis that the stock was when it was purchased. Keep the stock as long as you want, but when you do sell, you should pay taxes on every gain above the original $100 price.

The estate tax exemption is a different issue and I don't want to side-track the thread. But I'd prefer a very high estate tax rate and eliminate almost all other taxes altogether. But that isn't realistic with our current political state.
 

glenn1

Lifer
Sep 6, 2000
25,383
1,013
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There is no forcing to sell. If I buy a stock for $100, it appreciates to $1000 and you inherit the stock from me, you don't have to sell it. You wouldn't have to pay capital gains at that time either. But I see no reason that your cost basis should be $1000. It should be the same $100 cost basis that the stock was when it was purchased. Keep the stock as long as you want, but when you do sell, you should pay taxes on every gain above the original $100 price.

The estate tax exemption is a different issue and I don't want to side-track it. But I'd prefer a very high estate tax rate and eliminate almost all other taxes altogether. But that isn't realistic with our current political state.

Your cost basis gets stepped up to $1,000 with no capital gain tax, but that $1,000 is now subject to the Estate Tax. It's a "pay me now or pay me later, but you're still going to pay me" method of doing things which is stoooooooopid. This all goes back to my complaint about wildly different methods for determining your tax liability. In your example the tax due should have nothing to do with whether you sell it or not but that's the key factor.

To me the goal should be creating ways to categorize everything as income and subject to the same income tax rates. If you must then adjust how you calculate the basis or what exemption limits exist before you owe a tax liability, but this endless variety of tax calculations is ridiculous.
 

Exterous

Super Moderator
Jun 20, 2006
20,348
3,426
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If it was a wise investment, it is a wise investment even with higher taxes. Mathematically, investment levels shouldn't change much. I'd gladly take a $100M capital gains profit next year at 0% tax bracket, 10% tax bracket, or even heck a 90% tax bracket!

You don't always know if something is a wise investment. The inherent risk associated with stocks is why they have a higher return rate. Change the tax rate and lower the rate of return on stocks and you won't see people invest in stocks - they will look for alternatives. Personally I think that point is higher than where we are now although I do think we could do with another income bracket or two. And given the financial contortions available to people those who are willing to look will find ways. GST not stepping up your basis? Look into the Delaware Tax Trap. Estate Tax keeping you down? Just create a Charitable Lead trust.

I really don't want to see the hold duration increase. I don't think I should be forced to debate the value of holding onto something longer vs a decline in company price. 2+ years is more than enough time for a company to deteriorate as something I would hold

If I buy stock X today and sell it tomorrow for a $100 profit, company X gets nothing out of it.

I disagree that they don't get anything out of it. They don't directly benefit from a sale but a stock price has quite a few impacts on companies. Many retain shares of stock to use as part of negotiations with people and businesses. A higher stock valuation means a share can constitute a larger portion of the transaction lowering cash\loan costs. Eventually stock prices will affect loan types so while you getting $100 likely isn't a big change aggregations can impact credit availability. The same holds for partnerships and negotiations with other businesses. Changes in stock prices is also going to affect your employee retention and moral. For example in 2013 relative poor stock performance was cited as a reason for employees leaving Apple to work at Google, Facebook and (I think) HP. (So it might not necessarily be a good decision to leave for HP but the impact was there)

sonikku said:
This discussion is pointless. Even if it were to yield the most optimal solution for the most people possible it would basically never pass for that very reason. The laws, regulations and tax code have effectively been rewritten by the elite, for the elite. They would never allow legislation to pass that made taxes on income a more level playing field.

Many of the options available can be manipulated not because the lawmakers wanted a loophole but because new situations exist that were not thought of at the time. The Charitable Lead Trust wasn't created in 1986 just so the wealthy crafters could benefit from absurdly low interest rates and high stock gains for those trusts created in 2008 or later
 

Fern

Elite Member
Sep 30, 2003
26,907
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-snip-

But what if CG was taxed at the normal income rate when things like stocks are held for less than two years (which would cover those who make their normal income from CG) and then anything after that would be taxed at the normal GC rate?.

IIRC, at one time the required holding period was 24 months. I also remember an 18 month holding period.

Fern
 

mysticjbyrd

Golden Member
Oct 6, 2015
1,363
3
0
Works for me as long as there are no exceptions, no minority rule gimmicks. If expenses exceed revenues, a tax surcharge, immediately payable, kicks in to cover the current deficit. Spending would come down in a hurry if people felt the pain of spending decisions as they made them.


No.... The corporations buy the politicians, who then do fiscal favors, which in turn allows them to buy more politicians. If you screwed over the average citizens, then the only thing it would do is destroy the economy. The corporate corruption cycle, CCC, would still continue, and they would continue to leech trillions off the people.

Overtaxing the average joe to pay for corporate welfare isn't the answer. We have to tax the rich, fix the capital gains tax, close the corporate tax loopholes (No more 10 billion rebate check to corporations like GE), increase the estate tax, increase the threshold for those that pay into Social security, cut the subsidies, raise the minimum wage, and stop the obscene military spending.

If you did this, the debt would be a thing of the past. Of course, it won't happen though...
 
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BoberFett

Lifer
Oct 9, 1999
37,563
9
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If I understand you correctly. You would prefer to see long term holdings taxed at a certain percentage x inflation? Would short term then be at the income rate?

Personally I'd tax all capital gains as regular income, and simply adjust the basis amount to account for inflation. Seems to me that using an officially published inflation rate since the time of asset purchase that could be pretty easily calculated.
 

Zorkorist

Diamond Member
Apr 17, 2007
6,861
3
76
Before we do anything drastic, lets close the capital gains loopholes first. Here are two (closely related):

1) Donated stocks never pay capital gains, but you still get to claim the full stock amount as a deduction.

Very simple example: Buy $100 in stock, wait until it appreciates to $1000. Donate the stock. End result: you lost $100 from buying the stock but gain back ~$330 (typical state + federal tax savings) from the $1000 deduction. So, the whole ordeal nets you $230.

Why should the government be paying you when you get capital gains? Either (A) the donated stock should be valued at what you bought it at (how much risk you actually took) in this case you should ideally get just a $100 deduction, or (B) you should pay capital gains on stock that you donate (pay capital gains on the $900 and then take the full $1000 deduction). I'd accept either answer.

Note: I take advantage of this and strongly encourage others to do the same while the loophole exists!

2) Inherited stocks often don't pay capital gains.

Example, buy $100 in stocks, let it appreciate to $1000. When you die, the government treats your heirs as if they paid $1000 for the stocks when they sell it. They gain the $900 tax free forever. Neither you nor your heirs ever pays any tax at all on the $900 gain.

Note: estate taxes do eventually kick in, but this loophole basically offsets much of it.
No, lets fix the tax code. Let's simplify it, and put it in terms every American can agree to. No more bullshit. Straight taxes.

-John