View Full Version : Question about investing
I have long refused to invest because the places I could earn enough by doing it all support activities (like the military) I politically abhor. Yet others who have the same political views I do, invest anyway. What's the deal?
I'm not sure I understand the question - is your problem with the banks / brokers, or with the investments themselves?
loosechickens
3-29-11, 1:11pm
you could investigate various social investment funds to find one with a similar outlook on suitable investments and companies or industries they would not invest your money in.
I suggest that you might want to look into socially responsible mutual funds which screen out military contractors from their list of companies to invest in like the Pax World Fund, the Calvert Group of Funds or the Domini Social Investment fund. Their information is easily available from their web sites. A word of caution though, even the best companies have issues. Don't expect perfection just that the managers are are trying do more than the average unscreened mutual fund company to address the effects that companies have on society whether it's pollution, exploitation of labor or war.
At least give it a try so you can learn from your own experience.
Sincerely, Bicyclist
I tried some of those funds years ago. My question is about people who use the other kinds of funds.
A person can "invest" in any number of ways, not just mutual funds. Some invest in government bonds, some in real estate, some in individual stocks. I'm sure that an investor would be able to choose from the many options available without compromising their ethics.
I try to keep my investments local, where I can see my capital working for my community, and where I have some influence over what is going on. So I tend to buy bonds from local issuers, fund local mortgages and business loans, buy rental real estate, and that sort of thing.
I refuse to buy federal treasury products, because I don't like my money going to bomb innocent kids in faraway places at the whim of our imperial leaders.
loosechickens
3-29-11, 9:26pm
Also, some investors recognize that when they buy a company's stock, the only person benefitting is the person who owned and is selling that stock...it's not like the money is going to the company involved. The only time the company itself actually benefits from the sale of its stock is when it is first issued.
Sometimes investors like to invest in companies they have problems with so as to have a vote in stockholder matters.
Sometimes investors realize that there are few perfect companies, because the very system underlying investments may well be the problem, as is tax policy, etc.
And, sometimes people just look for the best returns, and figure that the company's are going to exist, and they might as well profit by them.
In the end, all you can do is hold yourself to a standard that is comfortable for you, and not spend time wondering why others behave as they do. Because, even they might not be able to give you a cogent statement as to why they invest as they do.
We have a few things that we really balk at, such as cigarette companies (having a father who died of lung cancer, don't want to feel I'm profiting by other people having health issues from the product), private prisons (because of having experienced a family member spending time in one of these), etc. Bae has his issues with Treasuries because of his feelings about war......each person has to find their own comfort level.
Try not to be such a purist that you look askance at those around you for not being "pure enough". It's a losing proposition, won't really change them, and will cause you untold misery worrying about it. Invest your own money in places where you feel comfortable and let others do the same is my own feeling. JMHO
I am sorry to have come across as judgmental--I was truly trying to understand, not trying to change anyone.
Actually, LC, when you buy stock in a company after the shares are initially issued, you are still benefitting the company by maintaining a market for the company's shares, allowing them to establish a value for any additional shares they may issue and providing a means of liquidity for employees who may have options.
The way I view it, my investments are only a small part of the web of voluntary associations I form and maintain in the course of living my life. While I try to avoid the obvious (to my mind, anyway) knaves or criminals that no gentleman should do business with, there’s limit to the amount of time I’m prepared to spend vetting the moral purity of all my transactions. I typically don’t consider the ethical pedigree of my barber, banker, grocer or S&P 500 index fund before doing before doing business with them. If I were to confine my associations only to parties who completely agreed with my personal version of right and wrong, I’d need to live in a cave and subsist on grubs and ditch water.
loosechickens
3-31-11, 12:25pm
"Actually, LC, when you buy stock in a company after the shares are initially issued, you are still benefitting the company by maintaining a market for the company's shares, allowing them to establish a value for any additional shares they may issue and providing a means of liquidity for employees who may have options". (bae)
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yes, that's all true, bae.....I was simplifying in the sense that the amount of money you pay per share does not go to the company in question, but to the person who was holding that stock (and as commission to the firm handling the sale, usually). I've always been surprised at the number of people who think that if they pay $20 per share for a hundred shares of XXX Corp., they've given $2,000 to XXX Corp. to use for their nefarious purposes. And since few to none of those people are buying IPOs, it's just not the case.
But what you say is completely accurate, definitely. Although in the case of most of our investments, in large, multi-national corporations, I doubt that we're accomplishing much toward providing liquidity, etc., but you never know, I guess. ;-)
The loosechickens said "our investments, in large, multi-national corporations, I doubt that we're accomplishing much toward providing liquidity, etc"
This is why I say keeping the tax rate at 15% on dividends is not fare to the average tax payer. Why should I pay a max of 15% on corporations like GE and other corporations that are large and their dividends are qualified. The investing class has a tax advantage in the US. If somebody invests in an IPO maybe they should get special tax treatment but not for buying someones shares in a large corporation from a broker.
ApatheticNoMore
3-31-11, 1:59pm
So if you don't invest where do you put your money? In the bank? They lend it out and sometimes to those same corporations you disapprove of. I think the only way to avoid this is under the mattress, or in gold bars or other collectibles or something. Then you truly DON'T invest.
The thing that always got me about the socially responsible funds was how socially irresponsible I truly considered most of the companies in them. All of course huge corporations. Those funds avoided certain industries like mining and so on that produce pollution, but were heavy in other industries like banking (yea I'm getting a little irrational on the ranting on the bankster topic, my main grudge against them is their theft of our wealth). They were really a form of sector investing that seemed to have only minimal to do with what I really consider socially responsible. Now an alternative energy mutual might meet my definition of socially responsible :)
loosechickens
3-31-11, 4:55pm
I couldn't agree more, freein05 about the preferential taxing of dividend income. Since virtually all our income comes in the form of stock dividends, bond interest (some of which is tax exempt completely) and capital gains, we make out very, very well in the "Federal income tax sweepstakes".
Yet, why do all these people who earn their livings in hourly wages or salaries keep voting for the people who tilt the playing field so significantly to the investor class and corporations? That's what just dumbfounds me.
Although I guess I do the same thing, only in the opposite direction, as I vote for those who would give a better deal to ordinary wage earners, which is not in my OWN best interest. But it's still hard to see why fairly poor people would vote for the ones who would give even more to the rich. At least I understand that I'm doing it against my own best interests, but so many that I talk to on the other side don't seem to realize it at all, and if they do, they expect to be rich some day themselves (like several I know in their 50s working close to minimum wage jobs with no benefits, but I guess hope springs eternal). When they get that winning lottery ticket, I guess, they want to pay as little taxes on their new riches as they can. Right.
I'd be glad to see dividend, interest and capital gains income taxed exactly the same as income earned by the hour or salaried in a job. That seems much more fair to me, and I continue to vote for those I think will give the ordinary worker a better deal, even if it means a lesser "deal" for me. For the good of the country as a whole, our system which gives ever more to those who already have the most is just not good for us, long term.
If you want to tax dividend as regular income, then eliminate the corporate tax on the front end, so that the shareholders are not doubly-taxed. (Something class warfare fans often fail to mention.)
And if you want to tax capital gains as regular income, index the gains to inflation, so people aren't being taxed on what are potentially losses. (Another inconvenient truth...)
Dharma Bum
3-31-11, 6:28pm
If you want to tax dividend as regular income, then eliminate the corporate tax on the front end, so that the shareholders are not doubly-taxed. (Something class warfare fans often fail to mention.)
And if you want to tax capital gains as regular income, index the gains to inflation, so people aren't being taxed on what are potentially losses. (Another inconvenient truth...)
:thankyou:
ApatheticNoMore
4-1-11, 12:33am
We've already had this debate. If capital gains are only taxed 15% due to inflation, why is the interest in a savings account, money market fund, or CD taxed at full income tax rates? This inconsistency makes no sense.
Inflation is really a whole thing of it's own and I'm not sure it benefits the poor as opposed to the rich (in theory yes because they owe more, but really where does inflated money go? into commodities, the stock market etc..).
loosechickens
4-1-11, 1:03pm
I think that we will never see the end of the wealthy finding ever more ways to frame arguments to ensure that they continue to have the most advantages.
Since 2/3 of American corporations pay no Federal income tax at ALL, lowering the corporate tax rate is meaningless, unless you do something about the army of lobbyists and wealthy campaign contributors that ensure that the tax code is littered with enough corporate loopholes that they don't have to pay the tax anyway.
If inflation does such damage to the fat cats, just imagine how much damage it does to ordinary people. I guess the next thing we'll see is all the wealthy bond owners complaining because by the time their bonds mature, inflation will have robbed them of profit, so they should get some kind of tax credit to make up for that.
Bah, humbug.....IMHO
Since 2/3 of American corporations pay no Federal income tax at ALL, lowering the corporate tax rate is meaningless, unless you do something about the army of lobbyists and wealthy campaign contributors that ensure that the tax code is littered with enough corporate loopholes that they don't have to pay the tax anyway.
I don't think you understand corporate taxes very well. What loopholes do you think exist that keep them from paying taxes?
loosechickens
4-2-11, 12:07am
here ya go, Dharma Bum....read them and weep.....
http://money.cnn.com/2008/08/12/news/economy/corporate_taxes/
excerpt:
"The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes - despite having a combined $2.5 trillion in revenue.
The study showed that 28% of foreign companies and 25% of U.S. corporations with more than $250 million in assets or $50 million in sales paid no federal income taxes in 2005. Those companies totaled a combined $372 billion in sales for the largest foreign companies and $1.1 trillion in revenue for the biggest U.S. companies."
http://abcnews.go.com/Politics/general-electric-paid-federal-taxes-2010/story?id=13224558
excerpt:
"For those unaccustomed to the loopholes and shelters of the corporate tax code, GE's success at avoiding taxes is nothing short of extraordinary. The company, led by Immelt, earned $14.2 billion in profits in 2010, but it paid not a penny in taxes because the bulk of those profits, some $9 billion, were offshore. In fact, GE got a $3.2 billion tax benefit."
and:
"Two things are disconcerting. One is, there's disproportionate amount of profits being reported offshore. And then, even for the profits that are reported onshore, they're paying less than 35 percent," said Martin Sullivan, a contributing editor for Tax Analysts.
2010 was the second year in a row that GE recorded billions in profits and paid no taxes."
Perhaps YOU'RE the one who's not up to date on corporate taxes.........;-)
As I said before, it doesn't make much difference if you have up to a 35% corporate tax rate if the companies spend millions doing creative accounting, moving money and business offshore, and paying lobbyists and campaign donations to ensure that loopholes abound.
That is a considerable misrepresentation of what "offshore" really means...
I earned a fair bit "offshore" last year. I didn't pay a dime of Federal tax on it, I bet I even got some credit back.
Because I paid foreign taxes on it.
I'd much rather have paid US tax rates.
loosechickens
4-2-11, 1:16am
I don't know about your offshore profits, bae, but I noticed that we got credits in the U.S. for much of the foreign dividend taxes we paid on global investments.
Maybe you just need to brush up on your "tax avoidance" loopholes, ;-) Maybe you could get some pointers from these big guys. From the Chicago Sun-Times
http://blogs.suntimes.com/sweet/2011/03/ten_giant_us_companies_avoidin.html
A list of ten big profitable U.S. companies paying little or no taxes.
1) Exxon Mobil made $19 billion in profits in 2009. Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.
2) Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion.
3) Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS.
4) Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.
5) Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year.
6) Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction.
7) Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.
8) Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury.
9) ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.
10) Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.
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between this kind of stuff and reading polls showing the incredible ignorance of the facts of many issues by American voters, I've either got to get to bed or start banging my head against the wall........sometimes I'm honestly glad I'm getting old, because it does seem sometimes like we are "going to h*ll in a handbasket" more than usual these days.
Loosechickens - go read GE's 2010 10K filing. It's pretty well explained, in gory detail. You are falling for someone's class-warfare talking points.
Loosechickens - go read GE's 2010 10K filing. It's pretty well explained, in gory detail. You are falling for someone's class-warfare talking points.
Ditto. They are playing within the rules established by the Feds and administered by the service. There will be a small army of IRS auditors going through the return; companies of this magnitude usually do not close an audit on a return for 3 to 5 years.
Just my 2 cents.
Ed
here ya go, Dharma Bum....read them and weep.....
I'm still waiting for a simple answer to my question. What loopholes exist that keep keep them from paying taxes? Can you answer that? What you provided was simply foolishness.
rodeosweetheart
4-2-11, 11:26am
"Now an alternative energy mutual might meet my definition of socially responsible "
Hey, Apathetic, what a good way to look at it! We could all do something similar, depending on what we deem socially responsible. Food for investment thought!
loosechickens
4-2-11, 1:28pm
"They are playing within the rules established by the Feds and administered by the service." (Eleighj)
Guys......(Eleighi, bae, Dharma Bum, etc.) SEE THE ABOVE. Is anyone saying that these companies have done something illegal? Am I accusing them of criminality? Of course not. They are "playing within the rules" that they have paid a great deal of money to lobbyists and in campaign contributions to make sure such rules are written in their favor, and will produce the above results.
That's my point. It's not specifically that they are not paying taxes, or how they managed their books to conform to the IRS rules that allow them to avoid them. It's that they have used their considerable power to make sure that the rules favor THEM instead of ordinary people.
Now, sometimes the rules that have been put in place to favor very wealthy investors and/or corporations help out us "little guys", even if we're not the intended recipients.
What you are saying does not speak at all to HOW those "rules" got made, who pushed for them, who contributed to the people who would vote for them or institute them once in power. You're kind of making a straw man argument here, methinks.
In the light of day, I'm feeling much better and am content to just nibble away at the crumbs dropped my way by those rules. "Playing by the rules" has worked quite well for us, as well, as we have taken advantage of some of those perfectly legal, tax avoidance loopholes ourselves. Just as people with mortgages take advantage of the tax loophole that allows them to count the interest paid on their mortgage against THEIR taxes.
Of course, the ordinary people only have a FEW of those tax loopholes, and the corporations and the very wealthy investors have a huge raft of them, but those of us who have followed the path to financial security and are now living on the income from our investments amassed by YMOYL type living, can at least feed on the crumbs dropped from the table, from those rules, which is nice..........
and "class warfare", bae, has been going along at a great clip in the last thirty years as massive wealth has been transferred from the middle class to the wealthiest 1 or 2% of folks. you make me laugh sometimes.
On this nice, sunny day in AZ, I'm willing to let them rake in the riches, as long as they continue to pay me my dividends and such dividends get such nice, preferential tax treatment......not to mention those handy "paper" losses we harvested (again, quite legally) that will protect ouf capital gains for years to come.
I don't vote for the people who make these kinds of policies, but if you guys do......thank you. Much appreciated.
;-)
Really? Wealth has been transferred? Wealth is some zero-sum limited natural resource?
Odd. My wealth all came from people engaging in voluntary transactions with me. I didn't break into their homes and steal it, or use the force of government to confiscate the products of their labor.
SEE THE ABOVE.
I saw the above and it's a silly assortment of timing differences and irrelevant information. Why is getting a government contract or a loan from the government a sign of impropriety on how much tax you paid? No one with a lick of sense or grain of knowledge about accounting would think they are a big deal or prove anything unless you are trying to sell papers or mislead the public.
All I'm asking you is to tell me what loopholes let companies avoid paying tax, but all I hear is blah blah some companies didn't pay taxes in some years or blah blah the rules are written by lobbyists. Time to put up or move on, what exactly are all these big loopholes you know about?
loosechickens
4-2-11, 11:17pm
Dharma Bum.....the "above" I'm talking about is the comment..... "They are playing within the rules established by the Feds and administered by the service." Because that is the crux of the matter, and as long as they are the people who are controlling the people who make the rules, the rules will favor them. Period. End of story. I'm not saying it's an "impropriety". I'm saying that they have a great big hand in the writing of the regulations they "play by", and who, given that advantage, wouldn't probably make the rules to suit themselves? There's nothing illegal about it. Unethical, perhaps by our elected representatives who make the laws and appoint the people who draw up regulations, but not illegal. Money talks and nobody walks......
Personally, since we own stock in six of those ten companies, I'm perfectly happy that you guys have voted for the people who gave them those great opportunities. I'm happy that they pay so little in taxes on all that profit. They all pay nice dividends.....we've done well with their stock......I'm happy. As I said before....."thank you."
Such things as forming shell companies, based in places like the Cayman Islands (as Halliburton has done with its subsidiary, Kellogg, Brown and Root), preferential tax benefits that actually make it even MORE profitable to move jobs out of the U.S., the list is endless, and you really know it. As you said, the companies are "playing within the rules"....the problem is that the rules are literally written by them and by the people they control.
Heck, just the rule that allowed us to divest ourselves of hundreds of thousands of dollars of stock that we never have any intention of actually selling, waiting 31 days and repurchasing it all, harvesting a quarter million dollars of paper losses that we can use to set against capital gains for years, AND which will allow our kids to inherit that stock with THEIR cost basis being its value at the time they inherited, means that we got all the benefit of those losses without ever actually incurring them. Because we own those stocks for the dividends they provide and would probably have died still owning them. And because the new cost basis will tick over for the kids, a bunch of profits from other investments will be protected from capital gains taxes literally for years because of harvesting those "losses", which weren't even real, just an accounting and tax paper loss.
Stuff like that is written into the tax code for the benefit of wealthy investors......heck, the bypass trusts were literally created to benefit one family, the Gallo wine folks, although many other wealthy folks have been able to pass on money tax free with bypass trusts ever since.
Hey, the trick is to figure out what all those benefits are and how to access them in your own lives.....they aren't MAKING those rules for you, but if you're smart, you can use them.
I don't know exactly what accounting loopholes are used by those big corporations. I'm not a corporation, so I've focused on tax benefits for individual investors in the tax code. I pay much more attention to such things as that "harvesting" of capital losses, or the benefits of holding limited partnerships, etc. Those corporations certainly are taking advantage of some if they manage to shelter billions of dollars in income from taxes.....it suffices for me to know that they can pay me much bigger dividends since they aren't being bothered by those pesky income taxes.....I'm sure they agree with Leona Helmsley......that's the "little people's job"....paying taxes.... ;-)
You're not going to agree with anything I say...you and Alan and bae and company have a worldview and an outlook very similar to those of the corporations and robber barons we're now creating again (as though we didn't learn the last time).....I'm sure you think it's just great......and that's fine....keep up the good work.
gotta go...have spent enough time on this and everybody's eyes are glazing over already.
Hey.......keep partying....... ;-)
AARRGGHHHH....I just realized that you, Dharma Bum, are Yossarian.......don't know why I even bothered. I know that whatever I say, you're just going to challenge. I could say the sky was blue, and you'd be willing to go to the mat, telling me it was pink.....
LC - there is clearly no point in any discussion of this with you. You are misrepresenting or misunderstanding matters of fact.
loosechickens
4-3-11, 12:06am
"LC - there is clearly no point in any discussion of this with you. You are misrepresenting or misunderstanding matters of fact. " (bae)
bae, I'm sure there are quite valid reasons that corporations put forth as to why they were able to avoid paying taxes. I have no doubt that every one of those things they do is perfectly legal. The point is that when the foxes are in charge of the chickens, the chances are that the chickens aren't going to get a fair shake.
What's that old saying......"If you're a lamb in a group with two wolves, never allow a vote to be taken as to what is to be eaten for lunch"?
I have no doubt that all those corporations can dazzle us with what great corporate citizens they are, how much they care, and how willing they are to pay taxes, if they only owed some. But who manipulated the rules and the people who make the rules? THAT is the question.
Not that you, or Alan or Yossarian care......who am I kidding? g'nite...... ;-)
loosechickens
4-3-11, 12:16am
One last little "factoid", and then I'm heading off to bed, no matter HOW hard you guys try to get me to stay, hahahaha.
They must be doing something right in the tax avoidance department. Surely all that lobbying money and campaign donation money has paid off.......
"Corporate taxes now account for less than 7 percent of all federal revenue. Back in the 1950s they accounted for about 30 percent of all federal revenue. "
And yet you can't point at any significant unreasonable rules, can you? (The "capital losses" issue you raise is bogus with any real analysis, as I'm sure you understand).
If a company has foreign operations, which generate profit in those foreign countries, on which taxes are paid in the foreign country in question, and then the earnings of that foreign subsidiary retained and reinvested in the operations in that foreign land, not paying US taxes on earnings that weren't earned here or brought into the country doesn't seem unreasonable.
Unless you propose to start taxing random British citizens too, to pay US taxes Just Because.
LC, you should read Darrell Huff's 1954 classic "How to Lie with Statistics". It used to be mandatory reading in the department. It might help you understand the flaws in your "reasoning".
loosechickens
4-3-11, 12:51am
Actually, I've read it, bae....but thanks. And if you have, surely you also understand how easy it is to find supposed "flaws in reasoning" as well......
and I can't say that I appreciate your condescension, but appreciate the thought.
there's one point of agreement, I think......the U.S. corporate tax rate should be lowered, because it is one reason why companies turn themselves inside out, create shell corporations in mailboxes in the Cayman Islands (Halliburton subsidiary, Kellogg, Brown and Root), and then, once the rate has been lowered, have them start methodically removing all the ways that U.S. corporations manage to make U.S. profits appear to have been incurred elsewhere, usually in places with little in taxes. But you know, and I know, that probably isn't going to happen, because the large corporations are perfectly happy with the status quo.
I assure you, those "paper capital losses" are going to spend really nicely......they sheltered quite a bit of capital gain this year alone. we were lucky in having bought some other stuff right at the bottom, and it's done really well. Not stuff we want to own long term, so we sold when the price went up quite a bit, but the free profit was nice.
That, of course, has nothing to do with the corporate tax stuff, but is just one more example of how the tax regulations are very helpful to holders of individual stock that they intend to hold long term, die with and allow their children to inherit. Most of whom are wealthy investors, and those of us ordinary folks only partaking of the crumbs that drop from the table, hahahaha.
Now, I really HAVE to go to bed. I keep coming back to see what you guys have said, but I can't keep my eyes open, plus, we're just plowing the same old ground, over and over, as usual, anyway.
g'nite... ;-)
Assume I purchase a share of WidgetCo for $10/share.
It drops to $5 in a market slump two years after I buy it. I sell it. Creating a $5/share capital loss. At that instant, it is a real loss. Actual money out of my pocket. Ouch.
But say I wait 31 days to avoid the wash sale rule, and during that time, the stock stays at $5 (to eliminate any discussion of the risk of being out of the market during this time, and other such real-world things that influence this approach hugely...). I buy it back, and decide to make myself feel better by calling the $5 real loss I suffered, if only briefly, a "paper loss". My new basis is $5. (remember this part....)
Now, say two years later Widgetco is back at $10 a share. Joy! I have a $5 profit if I sell it. And a $5 capital loss in my pocket to eliminate the tax on the gain. Darn, those rich people are clever. I'm glad I used LooseChickens' famous tax dodge!
Do you see the issue?
I started out with $10 on Day One. I ended up with $10, on Day N. And didn't owe any taxes on my net gain of...$0.
That seems...reasonable, eh?
You have to look at the whole life cycle... The whole death-and-taxes thing...
Dharma Bum
4-3-11, 10:15am
because the large corporations are perfectly happy with the status quo.
No, they are not and this illustrates well your misunderstanding of the status quo. I always hear about how we should look at European countries for examples, well here is one occasion where it cuts against you. The major issue for US companies is that the US has an extraterritorial tax system as opposed to a territorial tax system. We tax companies simply for being incorporated in the US so it creates a perverse incentive to be a foreign corporation. Most companies would prefer the European/Global model of taxing income where it is earned (the "territorial" model, or at least something closer to it) and be done with it. But we can't tax everyone willy nilly so we are left with an awkward set of misplaced incentives that much of the rest of the world doesn't have to deal with.
Unless you actually want to punish US companies for selling abroad or give them a competitive disadvantage against foreign competition.
But of course as someone who claims residency in a state you don't actually live in but that conveniently doesn't have a state income tax I'm sure you can sympathize with the way tax residency works.
Assume I purchase a share of WidgetCo for $10/share.
It drops to $5 in a market slump two years after I buy it. I sell it. Creating a $5/share capital loss. At that instant, it is a real loss. Actual money out of my pocket. Ouch.
But say I wait 31 days to avoid the wash sale rule, and during that time, the stock stays at $5 (to eliminate any discussion of the risk of being out of the market during this time, and other such real-world things that influence this approach hugely...). I buy it back, and decide to make myself feel better by calling the $5 real loss I suffered, if only briefly, a "paper loss". My new basis is $5. (remember this part....)
Now, say two years later Widgetco is back at $10 a share. Joy! I have a $5 profit if I sell it. And a $5 capital loss in my pocket to eliminate the tax on the gain. Darn, those rich people are clever. I'm glad I used LooseChickens' famous tax dodge!
Do you see the issue?
I started out with $10 on Day One. I ended up with $10, on Day N. And didn't owe any taxes on my net gain of...$0.
That seems...reasonable, eh?
You have to look at the whole life cycle... The whole death-and-taxes thing...
Unless I misread what Chickens posted, what you've written wasn't her example. In her example the stocks in question were sold and the loss taken and then rebought with the intention of their children inheriting them at some point in the future. When they get inherited they will get a new basis point at the time of the later of her or her husband's deaths. That basis point will be the same as it would have been even if they hadn't taken the paper loss.
Jp- I simpified, indeed, to examine the "paper loss" issue LC raised. As you point out, she has also in her accounts of this commingled the basis step-up issue. If you examine that, you will find that the step-up in basis occurs as part of closing the estate, a process that includes paying taxes on the value of the estate, including the value of securities marked to market. The tax is not avoided, as LC implies, and my analysts of the fundamental error behind her misrepresentation of ca total losses stands.
loosechickens
4-3-11, 2:41pm
sorry bae, you've got the flaw in YOUR reasoning. As JP1 points out, your example is completely different from our situation, and if we had any intention of selling the stocks that were sold for that paper loss during our lifetime, then indeed, if those stocks rebounded, that "paper loss" would become a wash when it was balanced against the gain.
BUT......we have stocks that we bought for their dividends. We anticipate still owning those companies and those stocks when we die, because our purpose in purchasing them was not growth, but income. Those stocks will not be sold in our lifetime. So in our case, that "paper loss" DOES shelter a great deal of capital gains from OTHER investments that we DO buy and sell, as in growth stocks, etc.
When we die, our stocks, which are held in revokable trusts, will pass to our children. The new cost basis of the stocks from which we harvested those paper losses, for THEM will be the price of the stock on the date of death, (or six months later, I think), whichever date they choose. Since we don't have YOUR degree of wealth, our estate is unlikely to exceed the exemption for the inheritance tax, so no Federal taxes will be due on the value of the estate.
Which means that WE were able to count a capital loss on those stocks by selling them at the bottom of the big downturn, giving us a new, lower cost basis, which if we were going to sell the stocks, the benefits of that paper loss COULD be wiped out when we sold them, but since we're NOT going to sell them, the loss was harvested, without really stopping the ownership of those stocks.
We were careful to reinvest the money from those sales at the time in exactly the same sectors and in similar stocks, so if the market took a big turn upward in that 31 days, we wouldn't lose out. For example, we might sell Pepsi, but would then buy a similar amount of Coke, sell Halliburton, but invest a similar amount in Schlumberger. As it was, the market moved very little during that 31 day period, so when we sold those new investments and rebought the ones we wanted to hold, it was pretty much a wash.
When my mother died, I inherited some shares of stock that she had owned for some years. She couldn't sell those stocks without incurring a big capital gain, so although she really wanted to sell them, she didn't want to have to pay the tax, and no huge downturn occurred in the market to allow her to do what I'm describing, so she held onto them. But upon her death, I inherited that stock and MY cost basis was the price per share on the date of her death, so when I sold some of those stocks a year later, I had very little capital gain, and virtually no tax to pay. And since her estate was well under the exemption amount for the estate tax, even at that time, there was no Federal tax due on the value of the estate. That is what we will be handing our children.
BUT, we also were able to shelter a considerable amount of capital gains taxes incurred by other investments that we DO and DID buy and sell through the crisis, before and after, that DID have good gains, and pay no taxes on those gains, because they were able to be offset by our "paper" losses. My mother was never able to do that, because during the time SHE owned those stocks no downturn of the magnitude of the 2008 crash happened, and she owned them during a period of years of big gains in the market.
Since no Federal taxes will need to be paid on the value of our estate, unless we win the lottery or something (hard to do when you don't buy tickets), our estate is likely to fall well within the allowable exemption limits set for the Federal inheritance tax.
With your hundreds of millions of assets and exposure to the Estate Tax, the situation for YOU might well be as you describe for YOUR estate, which may well have oodles of Federal taxes due on the value of your estate, but for us peons who have amassed most of our modest wealth with ordinary paying jobs, and awesome ability to live below our means and save and invest, it provides great benefit for us.
It's not a cookie cutter world, and I'm sure there are provisions in the tax code for you guys with hundreds of millions of dollars that are just as useful, although if your estate will be paying hefty Federal taxes under the Estate Tax, obviously this one might not be for you.
But for us, this particular provision came in very handy, and we have already seen more income sheltered from tax in this one year than the total cost of selling and rebuying those stocks, every penny we paid our adviser for the year, with quite a bit left over.
Like the corporations, we play by the rules, and although WE aren't in there, as corporations and very wealthy people are, manipulating the people who make the rules, some of the rules that are made for people wealthier than we are, still benefit us.....is that kind of an example of something like the "trickle down effect", except a "trickle down" that actually works?
But in your case, if you are facing Federal estate taxes on the value of your estate, which I'm sure you would be, unless you've taken advantage of other tax provisions available to the wealthy, such as charitable remainder trusts, etc., your situation WOULD be different. Even the very, very rich have their own burdens......... ;-)
You are confused.
Fortunately the people who craft our tax codes are sometimes able to do math, and understand the shell game you are engaging in to fool yourself.
loosechickens
4-3-11, 3:21pm
Nope, bae......I'm not. But this has become quite the dead horse, is probably boring the heck out of people skimming over it, and you aren't gong to change your mind no matter what I say.
I enjoyed having the tax cost basis of the stock I inherited from my mother be established by its value on the date of her death, and our children will do the same.
I am looking at my tax return right now and seeing several tens of thousands of dollars of capital gains from stocks that we've bought and sold in the past two years (not the stocks in question), sheltered and no tax due because of those "paper losses" incurred by that action.
End of story. Peddle your version somewhere else, since the brokerage AND the IRS are fine with mine.
I'm not saying you are doing anything wrong, LC. Simply that your interpretation of "paper losses" is incorrect.
No matter how much kerfluffle you throw into the matter to complicate things.
loosechickens
4-3-11, 3:39pm
well, whatever the "interpretation" we're going to be able to sell other stocks that we have gains in for a number of years without having to pay capital gains taxes on those gains because of this maneuver. So whatever you want to call it, I don't care. Only that we still own those stocks that we sold and then rebought 31 days later for virtually what we sold them for, have been able to "harvest" paper losses from them that we can use to shelter "real" gains from other stocks that we sell at a profit, and our kids can inherit those stocks, the cost basis will roll over for them at that time to whatever the stocks were worth at my death, and everybody's happy.
And the next quarter of a million dollars of capital gains we have on stock sales will be tax free of capital gains taxes because of those "paper losses" . Well, maybe thirty thousand dollars less than that, because we've already used up some of them this year sheltering capital gains from the sale of other stocks we sold in 2010 at a profit.
good day to you, as you are fond of saying, bae.....I think we've beaten this dead horse enough.
You can lead a horse to water...
I guess the short version of all this is that Chickens is below the threshold of the inheritance tax. Therefore she was able to take advantage of selling low to book a loss and then re-buying low in anticipation of leaving her children these stocks at whatever cost-basis they'd be at on her (and her husband's) death. People who have too much wealth can't do this. Chickens has actually found a loophole that only people of moderate wealth qualify for.
bae is either unaware that people below the inheritance tax threshhold can make use of the cost-basis adjustment at the time of death, or is intentionally ignoring it.
Dharma Bum
4-4-11, 11:55am
bae is either unaware that people below the inheritance tax threshhold can make use of the cost-basis adjustment at the time of death, or is intentionally ignoring it.
Selling to generate the loss is only beneficial to the extent you have other capital gains. Post sale gain on reinvested proceeds may result in a situation where the investor has an appreciated asset at the time of death, but that same result could have occurred if the investor had not sold the asset that generated the capital gain to begin with.
Investor X buys two stocks for 100 each. One goes up 50, the other down 50. X sells both for 200, the gain and loss offset, and X buys new stocks that double before death and X passes 200 (400 value less 200 cost basis) of gain tax free to her heirs.
Investor Y buys two stocks for 100 each. One goes up 50, the other down 50. Y does nothing and both stocks double in value double before death and Y passes 200 (400 value less 200 cost basis) of gain tax free to his heirs.
Not sure I see where the inheritance tax threshhold would affect that. In both situations it seems there would be an equal amount subject to estate tax and the loss recognition event doesn't seem to change anything.
Where is the injustice resulting from the loss recognition event? You may have a little more flexibility in managing the assets but there doesn't seem to be that much if any economic difference.
If X needed money, X can just sell the loss stock and still pass all gains in gain stock to heirs at time of death.
Tax loss harvesting is a legitimate strategy to take advantage of a rate arbitrage between LTCG and OI, but with a 3,000 cap it is a distinctly upper middle class play and in fact excludes the wealthy from any meaningful participation.
My CPA reminded me this year you invest to make money not for taxes. I have some investments in Germany and the German government takes 25% for taxes off the top before I get the dividend. I do not get a 100% of the German tax back on my US taxes. It has something to do with the ratio of foreign tax paid and US tax paid. So I asked him if I should sell some of the German stocks. He said if they are meeting your investing plan and giving you the actual income return you are looking for keep them. Basically he said invest for the safety and return of your investments not for taxes.
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