h a l f b a k e r yThis ain't rocket surgery.
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much noise was made recently of the possibility of taxing
unrealized gains -- one of the most pernicious, and frankly
idiotic ideas to seize the left flank of various political classes
and taxing authorities,
but we digress.
a recent news story about Eric Adams, the new Mayor of NYC
receiving
his pay in Bitcoin (as Bitcoin happens to be falling)
triggered this idea:
cash, in whichever currency, also fluctuates in value -- it is
measured in other currencies (i.e. the exchange rate) and in
inflation measures.
so if you had $100,000 in a savings account through last year
(2021), with the US annual inflation rate for the same year
being 7%, this money lost 7% of it's purchasing power, or
$7,000
If you had a billion (9 zeros) in the bank, you lost $70 Million
of
purchasing power.
lots of govt assistance programs adjust for inflation -- why
would savers be penalized (on TOP of actually losing
purchasing
power) by not being able to deduct the actual loss they
experience?
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Annotation:
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incidentally, if there's one thing that's genuinely exhausting
and beat your head against the wall irritating, is the
insistence by some truly distasteful politicians, like
Elizabeth Warren, on the idiotic "Warren Buffet's Secretary"
comparisons. |
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In the US, $75,000 annual salary is was a breakeven for
2020 -- meaning you did not pay net Federal Income Tax at
that number. Even at $100,000 income, your effective tax
rate is likely < 2% -- and that's not counting for major
deductions like the the home mortgage deduction. |
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So while it's completely obvious that Buffet in fact DID pay
more MONEY than his secretary, no dishwasher -- an
example Warren used in her latest attack on Musk-- no
dishwasher,
even one actually working on a paycheck rather than cash,
which avoids taxation alltogether -- no dishwasher has EVER
netted out a dime in Federal Income Tax |
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For symmetry, if you have a loan, does the reduction in the
loan value caused by inflation count as income? |
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If not, I'd like to loan you a million dollars at 0% interest, if you
loan me a million dollars at 0% interest. Then we can both
deduct $50,000 in losses from savings inflation. Of course I
made the interest rate 0% because otherwise we get taxed
on the interest income, but can't deduct the interest we pay
on the loan (unless it's the mortgage on our primary home).
Oh, wait, we can call that investment interest, so can deduct
it against investment earnings, so maybe the interest rate we
charge each other doesn't matter... |
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Speaking of taxing unrealized gains and loans, one loophole
I've heard of that really should be closed is the practice of
taking out a loan rather than selling appreciated stock. |
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Apparently, people who hold huge stock portfolios with
significant unrealized capital gains (company founders and
the like) will often take out large loans rather than selling
stock. They get highly favorable interest rates because
the stock they put up as collateral is worth way more than
what is being borrowed. Say they have $1B in stock and
take out a $100M loan. An article I read said that at the
time of death, the net value of the estate is the value of
the stock, minus the loan, so the estate tax is only on
$900M. But when stock is sold to repay the loan, the step-
up basis is already in effect, so there is no tax on the
gains. So basically they just got $100M with no tax on the
capital gain. This sounds completely wrong to me, but I
haven't been able to find enough information to prove that
this maneuver isn't allowed. |
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A lessor loophole exists, if a moderately rich person has
$10M of stock, which lets say has appreciated from $5M
over the last 10 years of their life, if they sell $1M to buy a
house for cash, they pay capital gains tax. If instead, they
take out a loan for the bulk of the house value, when they
die, they are under the limit for estate tax, so the step-up
basis allows for this to pass tax-free to their heirs. |
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It seems that a reasonable rule might be that if anyone
owning liquid capital assets (stocks, bonds, cryptocurrency,
etc.) takes out a loan (held for more than say 3 months or
something to avoid credit card use triggering this), they
must realize capital gain (and increase the basis) on the
asset of their choosing. Probably exclude tax exempt
retirement funds from this as well since those don't have
taxable capital gains. |
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