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Would You Trade More Frequently If There Were No Capital Gains Taxes?


berkshire101
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In countries like Belgium, Malaysia, New Zealand, Belize, and Hong Kong there are no capital gains tax rates.  I think.  There are studies that cite by trading frequently you hurt your returns due to transaction costs and taxes.  But what if capital gain taxes were to go away.  Would that increase the incentive to turnover your portfolio more frequently?  Just curious. 

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Great question. All of us have tax-sheltered retirement accounts and non-retirement. I find that many of my biggest winners are in my non-retirement account. I suspect I only got my 3-baggers and 4-baggers because I just dreaded paying capital gains. If they were in my retirement account I probably would have sold.

 

Buying and selling stocks is not black and white, it is just a balance scale on which you put your pros and cons and also your margin of safety and any other factors including taxes. Taxes is a big issue for me and it would tilt my mind towards holding.

 

The flip side is also true, taxes also caused me to hold, much to my regret. A few weeks ago I saw a 133% jump in one of my hong kong stocks. I held on because I couldn't bear paying 40% tax. And in an instant the opportunity was gone. I just know I would have dumped it all if it was in my IRA.

 

Incidentally I just learned from another thread that I could hold the HK stock in an IRA, oh crap too late for this one!

 

To see the post about the stock:

 

http://bovinebear.blogspot.com/2014/12/what-just-happened-in-hong-kong.html

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That's true randomep.  I rarely turnover my portfolio because I dread paying taxes.  The long-term capital taxes in the United States aren't too bad, they're around 15%.  It's the short-term that sucks.  Let's say I want to achieve 15% annually, I would have to return 25% before taxes.  That's a pretty high hurdle rate in a year. 

 

I guess the bright side is that you wouldn't be paying any taxes if you didn't make a profit. 

 

The thing with retirement accounts is that there's a limit on how much you can contribute.  But it's tax deferred so can't complain I guess.

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for many investors in the states, even the long term cap gains are taxed much higher than 15%, including state tax, medicare tax, etc.

 

It is roughly 33% tax rate for capital gains in the US.  The highest rate in the entire world.  Except in the areas outside of California.

 

I sure hope they can stop the dominos of communism from spreading here.  Hit the pinata and grab the candy that falls out.

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About a couple of years back, I realized that the performance of my retirement account over 5 years is about 10% better than the taxable account. I hold the same stocks in both portfolios and the main difference is that I am much more active in the retirement account actively trimming positions if there is a substantial run up and buying back on any subsequent dips. So I figured I would come out ahead even if I had to pay taxes and I am now little bit more active in the taxable account.

 

Vinod

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  • 4 weeks later...

For US citizens, get ready for more:

 

http://www.bloomberg.com/news/2015-01-18/obama-tries-tax-cuts-on-rich-again-offset-by-new-breaks.html

 

 

He would increase the top tax rate on capital gains and dividends to 28 percent from 23.8 percent. The rate was 15 percent when Obama took office in 2009, meaning that he’s proposing to almost double it over his two terms in office.

 

He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole.” Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

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He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole.” Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

 

Which is completely misleading since there is an estate tax over a certain amount. So really, it's not a loophole for the people, but just for the government to double tax us.

 

I hate war mongering gun slingers, but I'm voting Republican next year.

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For US citizens, get ready for more:

 

http://www.bloomberg.com/news/2015-01-18/obama-tries-tax-cuts-on-rich-again-offset-by-new-breaks.html

 

 

He would increase the top tax rate on capital gains and dividends to 28 percent from 23.8 percent. The rate was 15 percent when Obama took office in 2009, meaning that he’s proposing to almost double it over his two terms in office.

 

He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole.” Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

 

But how can he possibly get that done? He is a lame duck! Is he seriously thinking he can persuade the republican congress and senate to do as he says?

 

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i live in singapore with no cap gains taxes and i don't trade that much.. i think there are alot of "hidden" frictional costs involved which even though they are tiny they really stack up quickly once you trade alot e.g. fx fees, broker fees. In a passive account they might add up to 0.1 - 0.3% but once actively traded it could easily be up to 1 or 2% which will eat into returns

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He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole.” Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

 

Which is completely misleading since there is an estate tax over a certain amount. So really, it's not a loophole for the people, but just for the government to double tax us.

 

I hate war mongering gun slingers, but I'm voting Republican next year.

 

Excellent, you're making over 500k per year?  That's great, but your capital gains rate is already 20% now in that case (plus 3% or so for the ACA).

 

There's no way this can pass.  No one expects it to pass.  But it's about framing the discussion, setting the terms, something the Republicans have been excellent at over the past 30 years.  In great part that's why many people think in conservative terms right now. 

 

It's also what you would use in a basic negotiation, ask for terms that you think are too high to start with.  But reaching an agreement isn't the goal in this case.

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  • 6 months later...

In countries like Belgium, Malaysia, New Zealand, Belize, and Hong Kong there are no capital gains tax rates.  I think.  There are studies that cite by trading frequently you hurt your returns due to transaction costs and taxes.  But what if capital gain taxes were to go away.  Would that increase the incentive to turnover your portfolio more frequently?  Just curious. 

 

Well, no more... Starting in 2016 we will have a short term capital gains tax (when selling in the first 6 months) of 25-33% (not disclosed yet so hopefully not more). We will be able to deduct losses however. We also have a tax of 0.27% on any transaction and 27% tax on dividends for example. We are also the country with the highest personal income tax in the world. This current tax was brought in by our current right winged government and will surely be hicked many times when the left parties come into power.

 

It's estimated to bring in €28M (yes, million) revenue per year but many experts think that is a rather high estimate. So that is €2.54 per Belgian, good enough for a coke at a bar. I guess in a few decenia I'll be paying a sizeable portion of that?  By comparison, our transaction tax of 0.27% brought in €180M+ last year. So brokers and banks have a shitload of work to do and costs to make for taxes that will probably just offset (part of) the losses in the transaction tax revenues (because people will trade less frequently). It's a complete joke.

 

 

I know I'll be trading less frequently but I wonder what it will do with my returns. I'm very concentrated so I like to add and trim my positions constantly. For example with $NTLS in July alone I bought 2 times and sold 2 times, June basically the same. I was also able to sell most at $8+ some time ago after a quick run-up although I believe IV is likely >$12. I would have never sold any if there were short term taxes. I was happy to pay the transaction tax even though I could legally avoid it and will do that starting in 2016 by changing brokers. I believe this year alone NTLS is good for a 20% return on my portfolio and if I just bought and held on it would probably have only added around 10%.

 

It's an extraordinary year in terms of good timing and returns but goddamn this short term tax will sting. Worst of all is that it won't add any real tax revenues for the state so they will likely raise it and/or add LT capital taxes as well. Then I can deposit savings that were taxed at 55% (personal income) to invest and get taxed again at maybe 50% on any gains I make. It's why I'll be looking to buy more stocks like LMCA for the longer term as well and be diversifying more.

 

Also, wouldn't it make sense to buy higher risk stocks with high volatility after you lock in ST tax gains? After all, you can deduct any losses you make against your gains. If the risky stock goes up you got a little richer again (and if enough time, you can do the whole trick again with more money!) and if it goes down the state is paying for it. Any personal experience by members would be appreciated!

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Sounds like you should really consider switching countries. Paying 30% tax on a fictional 4% yield on your investments over ~21k euro sounds a lot better (instead of capital gains, dividend, tx taxes etc.). Of course you're not allowed to offset losses (4% per year positive result is assumed to be true). You can deduct foreign paid taxes such as dividend taxes to avoid fouble taxation.

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I live in the Netherlands and only pay a flat wealth tax (1.2% annually). I'm not sure under which tax code I would be better off if I optimize my trading decisions to minimize taxes but I strongly prefer a flat wealth tax. I guess it takes an outsider to realize how convoluted the U.S. system really is. For example the concept of "tax loss selling" is just completely bonkers from my perspective. The US tax code skews the whole market. Investors can't just analyze companies (as they should), they have to constantly take into account how taxes affect the profitability of their decisions. The administrative part also seems a huge headache to me (both for the tax payer and the government).

 

I can just buy and sell whatever I want whenever I want and at the end of the year I calculate my net worth and pay a small tax. Way, way easier.

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1.2% no matter what seems more attractive if you are able to do well enough and have some luck on your side with short term gains that would otherwise be taxed. In the future (10+ years) when I'm hopefully in the high 6 numbers area, I might go live there for exactly that reason, maybe right over the border. All family and friends still <1 hour away. But who knows, that's so far off and taxes (and people) can change plenty...

 

 

Also, wouldn't it make sense to buy higher risk stocks with high volatility after you lock in ST tax gains? After all, you can deduct any losses you make against your gains. If the risky stock goes up you got a little richer again (and if enough time, you can do the whole trick again with more money!) and if it goes down the state is paying for it. Any personal experience by members would be appreciated!

 

Anyone? Also, what about locking in gains with options? Of course less doable with foreign and small cap stocks;..

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1.2% no matter what seems more attractive if you are able to do well enough and have some luck on your side with short term gains that would otherwise be taxed. In the future (10+ years) when I'm hopefully in the high 6 numbers area, I might go live there for exactly that reason, maybe right over the border. All family and friends still <1 hour away. But who knows, that's so far off and taxes (and people) can change plenty...

 

 

Also, wouldn't it make sense to buy higher risk stocks with high volatility after you lock in ST tax gains? After all, you can deduct any losses you make against your gains. If the risky stock goes up you got a little richer again (and if enough time, you can do the whole trick again with more money!) and if it goes down the state is paying for it. Any personal experience by members would be appreciated!

 

Anyone? Also, what about locking in gains with options? Of course less doable with foreign and small cap stocks;..

 

I presume you are talking about put options, but they just delay the invetiable.  If your stock drops the option is in the money and will give you a capital gain when it expires.  Usually when you want to sell stock it is because the stock is overpriced, holding on becomes more and more risky.

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You really need to make some distinctions here.

 

We routinely hedge within tax sheltered (RRSP) or tax exempt accounts (TFSA) - because there is no tax impact. A 100% hedge means a 50% sale of our position, sitting on the proceeds, & committing to repurchase at a lower price by XYZ date. If we did this outside these accounts we would be taxed, & it wouldn't be worthwhile.

 

Trading more for speculation, is also very different to trading more for hedging; we trade to hedge. While to some there is no difference between speculation and hedging, thousands of farmers across the nation would adamantly disagree.

 

SD

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Trading can be hazardous to your wealth.

 

People always say that but is there some actual research to back this up? Not just from your average retail investor database I mean. Quotes from Buffett and Munger don't suffice either. As SharperDingaan says, it can be a way to hedge.

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Absolutely I would trade more frequently.  And to the economy's benefit.

 

Similarly, Buffett refused to sell KO during the 2000 bubble -- he had a low cost basis and with 35% cap gains he has to think about reinvesting the after tax proceeds at superior values.  Difficult for him to find better values with absolute certainty.

 

So that mentality leads to a less efficient market because it disincentivizes selling.

 

Just look to real estate where you can trade properties without triggering capital gains taxes.  Would having capital gains improve anything?

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If you really desire efficient markets, then allow equity investors to sell and buy other equities, or sell equities to buy real estate, or sell real estate to buy equities, or any other asset.

 

All without triggering capital gains tax so long as all equity is reinvested.

 

Don't disincentivize capital flow from overvalued to undervalued corners of the market. 

 

Tax only the equity that is not reinvested -- AKA the actual income that the investor chooses to spend and not reinvest.

 

Just create a new form of account similar to how IRAs are taxed except with no contribution limits and no withdrawal restrictions.

 

Pres Bush proposed this very thing.

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