Impacts of recent Capital Gains law proposal

[chriskim]

Do you think there will be any impacts of recent capital gains law proposal? Stock markets has been tanking and investors are cashing out. Will those money move into sports memorabilia? Or investors have already loss so much money and no more free cash to invest on sports memorabilia anymore?

The main thing is profit in selling sports memorabilia also consider as capital gains and it isn't a safe heaven to avoid paying taxes!

[TobaccoKing4]

Who cares Chris? The tweets have been really nice and not offensive at all and everyone knows that's what really matters when it comes to being a great President. No one has anything to worry about

[Tao_Moko]

Nothing new. Collectibles have been considered an asset eligible for short or long term gains for some time. You can get real answers by searching google for the same question posed here. Just make sure it directs you to irs.gov.

[rsdill2]

Originally Posted by chriskim

Stock markets has been tanking and investors are cashing out.

No comment on your main question. But I'm confused about this statement. Which stock market are you watching?

Rates of return for key US indices are attached below.

I can't see how you deduce that markets have been tanking.

[hcv123]

Originally Posted by rsdill2

No comment on your main question. But I'm confused about this statement. Which stock market are you watching?

Rates of return for key US indices are attached below.

I can't see how you deduce that markets have been tanking.

I have the same question. markets dropped a bit on the news yesterday, but a LOOOOONG way from "tanking"?

[packs]

I still don't understand where the POV that regular Joe's are selling Apple stock to buy cards comes from. No one is doing that.

[bigtrain]

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

[Vintageismygame]

Originally Posted by TobaccoKing4

Who cares Chris? The tweets have been really nice and not offensive at all and everyone knows that's what really matters when it comes to being a great President. No one has anything to worry about

Do you have a newsletter? If you do I would like to subscribe to it!! LOL

[Kutcher55]

Stock markets have been tanking?

[egri]

If this tax increase does come to pass, I think we'll see a lot of money moved into municipal bonds. The extent that impacts collectibles, stocks, and everything else that has been overheated this past year is anyone's guess.

[Casey2296]

Originally Posted by bigtrain

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

Here's a scenario where it would also apply.

Let's say an immigrant family came to NY 40 years ago with nothing, started a small business, say a restaurant, grocery, hardware store etc. spent their working lives not paying themselves a whole bunch, sacrificing days off, vacations, etc. raising a couple of kids who they want to leave a better life to than they had.

Now they're ready to retire. So they post their small business for sale and find a buyer that nets them just over a million dollars. Finally, a reward for 40 years of keeping your nose clean, working hard, being a part of your community, etc.

Some folks would call that the "American Dream".

With the proposed tax increase, which would put the rate at the highest in the world, and New York's current tax rate, that immigrant family would pay almost $600,000 to the State & Feds in taxes on that million dollar gain. Leaving them just over $400,000 for their retirement. Hardly the rich folks people love to hate.

The government also has a funny way of working that million dollar limit down over the years until it affects more and more people. Aka coming soon to a tax bracket near you.

[bobbyw8469]

Gotta pay for the green new something and all the cities being burned down some how. Tax away.

[TUM301]

Even crime wouldn`t pay if the government ran it !

[Johnny630]

"Nothing is so permanent as a temporary government program”

-Milton Friedman

[jayshum]

Originally Posted by Casey2296

Here's a scenario where it would also apply.

Let's say an immigrant family came to NY 40 years ago with nothing, started a small business, say a restaurant, grocery, hardware store etc. spent their working lives not paying themselves a whole bunch, sacrificing days off, vacations, etc. raising a couple of kids who they want to leave a better life to than they had.

Now they're ready to retire. So they post their small business for sale and find a buyer that nets them just over a million dollars. Finally, a reward for 40 years of keeping your nose clean, working hard, being a part of your community, etc.

Some folks would call that the "American Dream".

With the proposed tax increase, which would put the rate at the highest in the world, and New York's current tax rate, that immigrant family would pay almost $600,000 to the State & Feds in taxes on that million dollar gain. Leaving them just over $400,000 for their retirement. Hardly the rich folks people love to hate.

The government also has a funny way of working that million dollar limit down over the years until it affects more and more people. Aka coming soon to a tax bracket near you.

The highest rate someone is taxed at does not apply to every dollar earned. It applies to the amount above a certain level. In this case, if capital gains are taxed at the same rate as a person's earnings, then the amount earned above $1 million would be taxed at around 40% while the amount below would be taxed at the lower rates used for the different tax brackets currently in effect so the amount they paid in taxes would be considerably less than the $600,000 you indicate. Also, it's not like they would be going from paying nothing in taxes to whatever the total amount they would pay under any new tax law is, but that seems to be what you are implying.

[packs]

There might be one person in the world who fits that scenario.

[honus94566]

Originally Posted by TobaccoKing4

Who cares Chris? The tweets have been really nice and not offensive at all and everyone knows that's what really matters when it comes to being a great President. No one has anything to worry about

I totally agree! It's nice to have someone that knows how to be a decent human and doesn't make our country the laughingstock of the world. As an added bonus, he also knows how to spell words.

[chriskim]

I guess most people here are long term investors. I am more of a short term investor who is heavily invest in tech stocks, with that said, I guess I could be the only one seeing my portfolio turned from green to red and staying red recently. My bad for calling the stock market is tanking. sorry...

[Exhibitman]

The OP question is based on two false premises. (1) gains on cards have always been taxable, and (2) cards are not subject to the same preferential 15%-20% capital gains rate as stocks. Collectibles are taxed at up to a 28% rate:

https://www.irs.gov/taxtopics/tc409

In some cases it may be more efficient to form a business and pay marginal income taxes on net profits than to take a capital gains approach to card sales. It all depends on each person's specific financial profile. One thing I am pretty certain of is that no one is moving money from tax-efficient investment like stocks held for more than a year to a less efficient one like cards if they are making decisions based on capital gains taxes. Money is going into hard assets like cards because of two factors: (1) a belief in short-term potential for flipping in and out at a profit that cannot be garnered in other investments, and (2) as a small piece of a portfolio to hedge against inflation, similar to how metals and other tangible assets have been treated in the past. As to the latter, with the high expenses to enter and exit the market, I think it is not a good investment relative to others. But they are fun to own; you can't beat looking the Bambino in the eyes.

[Yoda]

I believe the proposed new tax law aims to restore tax equity by making some hedge funds' income, now treated as capital gains as taxable income. I imagine the present treatment has cost the Treasury billions.

Should be some fireworks in Congress on this one.

[rjackson44]

Could care less

[TobaccoKing4]

Originally Posted by chriskim

I guess most people here are long term investors. I am more of a short term investor who is heavily invest in tech stocks, with that said, I guess I could be the only one seeing my portfolio turned from green to red and staying red recently. My bad for calling the stock market is tanking. sorry...

You aren't the only one. Growth tech will be back once the inflation data settles down.

[pwang100]

Originally Posted by rjackson44

Could care less

I never understood the saying " Could care less".. shouldn't it be " COULDN'T care less"?

Sent from my SM-G950U using Tapatalk

[perezfan]

Maybe he really could care less.... meaning he really does care?

[Republicaninmass]

Originally Posted by TobaccoKing4

You aren't the only one. Growth tech will be back once the inflation data settles down.

Curious how this one ages.

I'm my OWN contrarian indicator

[samosa4u]

Originally Posted by chriskim

Stock markets has been tanking and investors are cashing out.

Yeah, I know, and I bought a PSA 6 Leaf Jackie Robinson last night for $1,500.

[egri]

I've been hearing some version of the stock market is tanking/about to tank since 2011, when we were going to enter a double-dip recession like the EU did. During that time, the S&P 500 has gone from 1,257 to 4,183. There have been hiccups along the way, but with my time horizon, I'm not worried.

[TobaccoKing4]

Originally Posted by Republicaninmass

Curious how this one ages.

I'm my OWN contrarian indicator

Uh oh I've been quoted! Lol take it with a grain of salt, I'm not a financial advisor but from my understanding that's the way it will work. Fortunately Im young enough to get bailed out by my time horizon if I'm wrong

[butchie_t]

If my financial advisor EVER told me to sell my portfolio and reinvest in sports cards/memorabilia, I will immediately be looking for someone much more saner and stable.

[packs]

Only card collectors invest in cards. There are no circumstances that will ever change that.

The only things non-collectors buy are whales like the 52 Mantle. But that is the same type of person who wants to collect art so they seek out a Picasso. They are not actually interested in what they're buying, they just know it's expensive. That person is not going to filter themselves down into obscure Old Judges and type cards.

[rjackson44]

Originally Posted by pwang100

I never understood the saying " Could care less".. shouldn't it be " COULDN'T care less"?

Sent from my SM-G950U using Tapatalk

Couldn’t care less lol

[TobaccoKing4]

Originally Posted by honus94566

I totally agree! It's nice to have someone that knows how to be a decent human and doesn't make our country the laughingstock of the world. As an added bonus, he also knows how to spell words.

100% man! Paying more for gas and some rando in Paris not being upset improves my life tenfold. Really looking forward to being able to leverage the joy and emotional comfort of the European populous into buying a house and supporting my family!

[egri]

Every thread needs a card.

[Huysmans]

Originally Posted by TobaccoKing4

100% man! Paying more for gas and some rando in Paris not being upset improves my life tenfold. Really looking forward to being able to leverage the joy and emotional comfort of the European populous into buying a house and supporting my family!

Thanks for making my afternoon... this comment was spot on.

[chriskim]

Originally Posted by egri

Every thread needs a card.

fixed

[Eric72]

Originally Posted by egri

Every thread needs a card.

Adam already posted a Ruth; however, I'll add this one.

Mugsy couldn't care less.

[BobC]

Originally Posted by Casey2296

Here's a scenario where it would also apply.

Let's say an immigrant family came to NY 40 years ago with nothing, started a small business, say a restaurant, grocery, hardware store etc. spent their working lives not paying themselves a whole bunch, sacrificing days off, vacations, etc. raising a couple of kids who they want to leave a better life to than they had.

Now they're ready to retire. So they post their small business for sale and find a buyer that nets them just over a million dollars. Finally, a reward for 40 years of keeping your nose clean, working hard, being a part of your community, etc.

Some folks would call that the "American Dream".

With the proposed tax increase, which would put the rate at the highest in the world, and New York's current tax rate, that immigrant family would pay almost $600,000 to the State & Feds in taxes on that million dollar gain. Leaving them just over $400,000 for their retirement. Hardly the rich folks people love to hate.

The government also has a funny way of working that million dollar limit down over the years until it affects more and more people. Aka coming soon to a tax bracket near you.

As an earlier poster, Jayshum, accurately pointed out, individuals are subject to graduated federal tax rates or tax brackets. You don't end up paying the highest possible rate on every single dollar of taxable income that you earn. At least not under current federal tax law, and I doubt such a new tax law allowing that to happen would ever be passed.

And for your specific example, I would hope that such an intelligent, hardworking, and successful business owning family would have paired up along the way with a good tax person who would assist them with such a sale. For if your currently incorrect position that the couple in your scenario would end up paying almost 60% of their total net taxable profit from the sale of their business in federal and state taxes should the proposed capital gains tax laws being discussed get enacted, and that resulting tax hit was largely due to the couple exceeding the $1MM taxable income threshold set by such a new tax law, a smart tax advisor would simply suggest they structure the payment(s) for the business sale so they don't receive all the sales proceeds in one single tax year. That way the transaction is afforded installment sales treatment and the resulting gain/profit can be spread over more than a single tax year. And by doing this you hopefully keep the couple from crossing the $1MM taxable income threshold that ends up triggering the more onerous tax rates the proposed law would put into effect. And it could have the added beneficial tax saving effect of allowing the couple to take advantage of the lower tax bracket rates for more than just a single year also.

Also, don't forget that federal income taxes are levied only on the NET profit/gain from the business being sold. I would assume that this couple may have some basis in inventory, fixtures, buildings, land, and other possible assets that they had acquired over the years in the operation of the business. They would also be receiving their basis in these assets as part of the sales proceeds from selling their business, and these dollars simply repaying them for their basis in those asssets are not taxed. So the end result should hopefully be more dollars in the couple's retirement pocket than the $400K+ amount you mentioned.

If you really want to be concerned about some of these proposed new tax laws, also pay attention to the idea they have about doing away with stepped-up basis when someone passes away. There is no specific income or dollar amount threshold being mentioned, nor any true idea of what this could end up being and who it could effect. For now though under current laws, when someone passes away their assets are inventoried, valued, and depending on the total value of all the assets , prior gifts, and possibly many other factors, the estate may be subject to and owe a federal estate tax on the decendent's assets. Meanwhile, the assets that are then left to the decedent's children or others (not including a surviving spouse) are generally given a stepped-up basis to their FMV (fair market value) at the time of the decedent's passing. So under current law, if you passed away and left your lifetime card collection to your children, their tax basis would most likely be the FMV of the collection on the day you passed. So assuming your kids consign the collection to an auction house for sale not long after your passing, it will most likely sell for close to that FMV, and probably results in little to no taxable gain to your kids, even if had acquired cards decades ago at signicantly less than what they are now worth today. So in a possible worst case scenario, if there is a new tax law enacted that does away with this basis step-up, in my example the tax basis of your collection now in your children's hands could be what you originally paid for everything. So now if they auction everything off, they could end up with significant gains that they would owe taxes on. And another potential issue is, how do your kids know what your original basis in the collection even is? Now for someone with a signicant collection, they are going to want to somehow document and support their tax basis in that collection so they don't make a problem for their heirs. Just something else to be aware of and to keep an eye on to see where it may go.

I do wish people would be a little more careful on the forum when tax questions are brought up as they may not know all the pertinent facts and circumstances when responding, thereby possibly giving some people reading such threads a wrong or innaccurate idea or answer. There are often exceptions and special rules/conditions that impact or vary the answer of a particular tax question. And in the case of discussions involving potential new or proposed tax laws, take everything with a big grain of salt until something is actually passed and signed into law.

[Rhotchkiss]

Originally Posted by BobC

If you really want to be concerned about some of these proposed new tax laws, also pay attention to the idea they have about doing away with stepped-up basis when someone passes away. There is no specific income or dollar amount threshold being mentioned, nor any true idea of what this could end up being and who it could effect. For now though under current laws, when someone passes away their assets are inventoried, valued, and depending on the total value of all the assets , prior gifts, and possibly many other factors, the estate may be subject to and owe a federal estate tax on the decendent's assets. Meanwhile, the assets that are then left to the decedent's children or others (not including a surviving spouse) are generally given a stepped-up basis to their FMV (fair market value) at the time of the decedent's passing. So under current law, if you passed away and left your lifetime card collection to your children, their tax basis would most likely be the FMV of the collection on the day you passed. So assuming your kids consign the collection to an auction house for sale not long after your passing, it will most likely sell for close to that FMV, and probably results in little to no taxable gain to your kids, even if had acquired cards decades ago at signicantly less than what they are now worth today. So in a possible worst case scenario, if there is a new tax law enacted that does away with this basis step-up, in my example the tax basis of your collection now in your children's hands could be what you originally paid for everything. So now if they auction everything off, they could end up with significant gains that they would owe taxes on. And another potential issue is, how do your kids know what your original basis in the collection even is? Now for someone with a signicant collection, they are going to want to somehow document and support their tax basis in that collection so they don't make a problem for their heirs. Just something else to be aware of and to keep an eye on to see where it may go

I dont mind eliminating the step-up of basis on death to the extent that assets are passed tax free. In other words, if the estate tax exemption is $5mm, and someone dies and leaves a $5mm asset, with a $500k basis, to their heirs, I have no problem with the heirs taking the asset with a $500k carryover basis. That is sound tax policy - defer the tax until realization, not eliminate it. At the same time, I would fully expect that any asset subject to estate tax would be passed to heirs with a stepped up basis because tax has already been paid. That too is sound tax policy. Query what happens when an estate worth $20mm is passed, $5mm is exempt, and tax is paid on $15mm of wealth/value - how do you determine which assets get a step up and which get a carry over basis? I guess that is what regs are for.....

[egri]

Originally Posted by BobC

As an earlier poster, Jayshum, accurately pointed out, individuals are subject to graduated federal tax rates or tax brackets. You don't end up paying the highest possible rate on every single dollar of taxable income that you earn. At least not under current federal tax law, and I doubt such a new tax law allowing that to happen would ever be passed.

My concern with that is the brackets come down over time, while rates generally go up. Adjusted for inflation, when the income tax was introduced, the top bracket was 7% on incomes above $12.9 million. Now it's 37% on everything above $500,000. Four years after the tax started, the top rate was 67%, and with the exception of a few years in the 1920s, it stayed above 60% (and often above 70/80/90%) until the late 1980s. Since then it's been going back up, with occasional cuts never sending it back down as low as it was before. If someone is smart enough to build a successful business from scratch, they're probably also smart enough to look at that trend, then find the Cayman Islands on a map, as Sir John Templeton did.

[BobC]

YYyYyyyyyy

Originally Posted by Rhotchkiss

I dont mind eliminating the step-up of basis on death to the extent that assets are passed tax free. In other words, if the estate tax exemption is $5mm, and someone dies and leaves a $5mm asset, with a $500k basis, to their heirs, I have no problem with the heirs taking the asset with a $500k carryover basis. That is sound tax policy - defer the tax until realization, not eliminate it. At the same time, I would fully expect that any asset subject to estate tax would be passed to heirs with a stepped up basis because tax has already been paid. That too is sound tax policy. Query what happens when an estate worth $20mm is passed, $5mm is exempt, and tax is paid on $15mm of wealth/value - how do you determine which assets get a step up and which get a carry over basis? I guess that is what regs are for.....

Unlike most all the other tax law proposals they have been talking about, no one has put forth any real specifics yet as to exactly how eliminating the stepping-up of basis for inherited assets would be implemented and what, if any, effect it may have in regards to estate taxes or other possible taxes that may come out of all these potential changes they are proposing. And that is why I said this is an area to maybe keep an eye on since it is so uncertain.

As you said, it makes sense that any inherited assets that are subject to the estate tax would get passed through with a stepped-up basis, so they aren't subjected to a form of double taxation. But many would argue that the estate tax itself is already a serious violation of the no double taxation rule in that assets a person has acquired over their entire lifetime (with money they worked hard for and already paid tax on) for the benefit of themselves and their family, is being suddenly taxed again now that they have passed. But estate taxes are a form of excise tax and not an income tax, so therefore in the government's eye, I don't think they'd look at it as double taxation. The estate (and gift) tax exemption is in place for various reasons, like allowing people to pass some of their hard earned assets on to their heirs without the government imposing a politically unpopular estate tax on every single person that passes. Also, without such an exemption, just think of the increase in tax filings that would suddenly hit the IRS, not like they aren't already overworked, understaffed and underbudgeted with all the covid and stimulus activity and changes they are going through now. Historically, up to now, estate tax returns are only filed for about 1%-2% of the people that pass each year, and similarly, estate taxes paid each year only cover about 1%-2% of the federal annual budget.

So up till now, they kind of treated the estate tax exemption like the standard deduction for personal income tax purposes. You use both to reduce the amount ultimately subject to the respective estate/income tax, but both are still part of the tax base. And that is why under the current law, the portion of a deceden's assets that aren't actually taxed because they fall under this estate exemption amount are still considered as having been subject to the estate tax, just at a 0% estate tax rate, and are therefore still eligble for the step-up in basis to the decedent's heirs.

One of my concerns is that in the future they may change the estate tax laws so that inherited assets on which no estate taxes are paid because of the estate exemption do not get a basis step-up. Along with the great question you pointed out about how do you then decide which inherited assets get stepped-up and which ones don't in an estate that is partially taxable and partially not taxable (I can only imagine the treasury regs they would come with to explain how to do that), you would now have to have everyone keeping track of their tax basis for all their assets so when they pass on the executor of their estate can be responsible for letting all the heirs know what tax basis they now have in what they inherit. So for someone who leaves a lifelong card collection, the executor better hope they find the decedent kept great records so they can determine what the collection may have as a tax basis.

And the worst part is, if something like that does get enacted it will potentionally effect everyone, not just those making more than the $400K a year they have been alluding to. Let's face it, the government wants more money and just going after people making more than $400K a year may not cut it for what they need. Planning for and being concerned with estate taxes is something the average person doesn't ever really think about. Enacting new laws like this could change that, and possibly create a real nightmare and more headaches and work for accountants, attorneys, courts, the IRS, and anyone else involved with estates going forward.

And don't forget, they actually did away with the federal estate tax for one year, in 2010. Actually, Congress let it lapse due to their inaction on the issue. This also did away with the usual basis step-up rules for inherited assets that same year as a result. Congress could have gone ahead and just done away with estate taxes (and the basis step-up of assets) going forward then. But before the end of 2010, they finally enacted legislation to reinstate the federal estate tax laws in 2011 to approximately what they had been before 2010. They also gave executors of estates of people who passed away in 2010 the option of either choosing to file and pay estate taxes after all, and to therefore get the normal basis step-up, or to forego paying federal estate taxes and not get the normal basis step. I'm guessing a main reason that Congress decided to reinstate the estate tax laws as they had been was because even though it may only have brought in 1%-2% of the annual federal budget, they didn't want to take a chance and forego that normal cash flow stream.

I also remember 2010 was the year George Steinbrenner died and there was a lot of speculation as to whether or not they would pay the estate tax on his ownership of the Yankees. (See, even got a baseball reference in there to try and keep it on topic.) No idea which way they ended up going.

Bottom line is to watch this and see what they might end up doing tax-wise.

[Seven]

I could see people moving more money into Residential Real Estate, I have two close friends who work in Finance, and their advising many of their clients to go that route. If anything it's going to maintain the already sky high residential real estate prices, Not like I'm complaining about that though.

I don't think it effects cards though.

[BobC]

Originally Posted by egri

My concern with that is the brackets come down over time, while rates generally go up. Adjusted for inflation, when the income tax was introduced, the top bracket was 7% on incomes above $12.9 million. Now it's 37% on everything above $500,000. Four years after the tax started, the top rate was 67%, and with the exception of a few years in the 1920s, it stayed above 60% (and often above 70/80/90%) until the late 1980s. Since then it's been going back up, with occasional cuts never sending it back down as low as it was before. If someone is smart enough to build a successful business from scratch, they're probably also smart enough to look at that trend, then find the Cayman Islands on a map, as Sir John Templeton did.

With the Tax Reform Act of 1986 they dropped the top individual tax bracket rate from 50.0% down to 38.5% on taxable income in excess of $54,000 for single individuals, starting in 1986. In contrast, the top individual tax bracket rate for 2020 is 37.0% on taxable income in excess of $514,800 for single individuals. And I believe the highest the individual tax bracket rate has been during this period from 1986 was 39.6%, with the lowest top bracket rate during this same period at 35.0%. So in truth the top tax bracket rate is actually lower today than it was about 35 years ago in 1986, and during those ensuing 35 years has never been more than 1.1% higher, at a top bracket rate of 39.6%.

As I noted above, the top individual tax bracket rate for single taxpayers started at $54,000 back in 1986, and has since risen to now starting at $514,800, almost 10 times what the top bracket rate started at back in 1986. Meanwhile, in looking up a few measures of inflation in time over that same 35 year period from 1986 to today I found:

The average annual inflation rate over that 35 year period is 2.55%

$1 in 1986 adjusted for inflation is worth $2.42 today in 2021

The CPI (consumer price index) in 1986 = 109.600

The CPI in 2021 = 264.877

Given all that, I think an almost ten times increase in the amount at which an individual starts to pay income taxes at the highest marginal tax rate over the same 35 year period as these inflation measures is not too shabby. So exactly where are you getting your data from that indicates that since the late 1980's that the top marginal tax rates have been going up, and that the tax brackets have been going down?

As for business owners potentially moving away from the U.S. if they begin to feel their tax burden is becoming too heavy, that is one reason that all the rhetoric spewed about having the rich and well-to-do pay an even bigger share of their income as taxes is just that, rhetoric, to appease a portion of the voting masses. The government knows they can't afford to completely alienate a good portion of their business community and its leaders, for fear they would pull up and move elsewhere. The business world has changed so much since WW2 with major leaps in technology, tranportation/logistics, computers and the internet, and the globalization of the marketplace. Companies that used to just worry about producing/providing for the U.S. market are now able to go global and easily reach and deal with customers and suppliers anywhere in the world. And that has become even more pronounced in the midst of the covid pandemic as companies and people started being forced to work more remotely than they ever had been before. And as a result, to pick up and move business operations and people to other parts of the world may not be as difficult and far-fetched as previously may have been thought. So now the federal government does have to pay attention to how they tax and treat businesses and their owners else possibly lose them to other countries. Luckily we are still one of, if not, the top consumer economies in the world. That will keep a majority of businesses from ever leaving due to the need to be here in the U.S. to fill our consumer needs. And then of course, despite all the negative things that have occurred in recent times, an overwhelming majority of Americans still consider this the greatest country on the planet and would rather live in the U.S. than anywhere else in the world. But despite all that, our government will likely still not go overboard with tax increases to the business community and its owners/leaders for fear of starting to change such pro-U.S. thinking.

[pbspelly]

I've never understood the justification for the stepped-up basis, particularly for things like stocks. Someone gives you stocks they bought for $5000 that are worth $10,000 when they give them to you, and you sell them for $10,000, you owe capital gains on the $5,000 gain. Someone dies and leaves the same stocks to you in their will, and you sell them for $10,000, you owe nothing on the $5000 gain. Why does their death wipe out tax liability for the $5000 gain? I'm not a tax lawyer, and maybe there is some justification, but I don't see it.

Likewise, the carried interest treatment for hedge fund manager income has always seemed like a huge loophole to me.

[Exhibitman]

Originally Posted by pbspelly

I've never understood the justification for the stepped-up basis, particularly for things like stocks. Someone gives you stocks they bought for $5000 that are worth $10,000 when they give them to you, and you sell them for $10,000, you owe capital gains on the $5,000 gain. Someone dies and leaves the same stocks to you in their will, and you sell them for $10,000, you owe nothing on the $5000 gain. Why does their death wipe out tax liability for the $5000 gain? I'm not a tax lawyer, and maybe there is some justification, but I don't see it.

Likewise, the carried interest treatment for hedge fund manager income has always seemed like a huge loophole to me.

As to the former, the justification is that the government has already had its bite at that money via the unified tax credit. When you die right now you can pass the first $11.7 million tax-free. After that you pay estate tax. The asset has already been 'taxed' when it passes, with valuation at fair market value, so the idea was that the G doesn't get a second bite at the asset at the decedent's basis when the heir sells it.

As to the latter, it is total BS: there is no reason other than good lobbying on the part of the rich for earned income to be taxed at a higher rate than any other income. The idea of investment being encouraged is crap; no one who builds a business does so based on taxes, except the accountants who file them.

[pbspelly]

Originally Posted by Exhibitman

As to the former, the justification is that the government has already had its bite at that money via the unified tax credit. When you die right now you can pass the first $11.7 million tax-free. After that you pay estate tax. The asset has already been 'taxed' when it passes, with valuation at fair market value, so the idea was that the G doesn't get a second bite at the asset at the decedent's basis when the heir sells it.

As to the latter, it is total BS: there is no reason other than good lobbying on the part of the rich for earned income to be taxed at a higher rate than any other income. The idea of investment being encouraged is crap; no one who builds a business does so based on taxes, except the accountants who file them.

So the government has already had its first bite, but only if the estate is worth more than $11.7 million. Otherwise there is no bite at all, right? Maybe they should eliminate the step-up basis unless the asset was taxed as part of an estate that exceeded $11.7 million. The main argument against an estate tax is that the decedent already paid taxes on those earnings or property during his or her lifetime. So it isn't fair for the government to tax the same thing twice. But that wouldn't apply for unrealized capital gains, right? Taxes have never been paid on that, and with the step up basis, they never will. I'm sure there are complications and stuff I am not seeing, but it seems to me that this is a loophole.

[Exhibitman]

Originally Posted by pbspelly

So the government has already had its first bite, but only if the estate is worth more than 11.7 million. Otherwise there is no bite at all, right? Maybe they should eliminate the step-up basis unless the asset was taxed as part of an estate that exceeded $11.7 million. The main argument against an estate tax is that the decedent already paid taxes on those earnings or property during his or her lifetime. So it isn't fair for the government to tax the same thing twice. But that wouldn't apply for unrealized capital gains, right? Taxes have never been paid on that, and with the step up basis, they never will. I'm sure there are complications and stuff I am not seeing, but it seems to me that this is a loophole.

Absolutely, it is a loophole, but one that has a practical purpose to it: the credit is designed not to force the heirs to highly appreciated residences, farms or smaller businesses to sell off the assets to pay taxes. Used to be $3.25 million but was jacked up and indexed to inflation. The UK, by contrast, taxes inheritances worth more than 325,000 pounds unless left to a spouse or charity, which forces lots of heirs to sell off the family jewels, family home, family business, or family land, to pay it. It is also why so many of the historic estates either have been gifted to the National Trust or opened commercially to pay the inheritance tax. When our estate tax was pegged low, it was not unusual for many people who you would think of as average middle class or professional class to have to engage in all sorts of machinations (bypass trusts, irrevocable life insurance trusts, etc.) to find ways around the estate tax because a nice home in a desirable area, a decent retirement savings, plus any other sort of asset and a life insurance policy would trigger taxation. It also bred a lot of cheating: offshoring funds, cash and hard asset holdings with 'five finger discounts' to heirs with access to safe deposit boxes, and so on.

[pbspelly]

Maybe I'm being obtuse, but I still don't quite see the reason for the step-up rule. Why not simply have a rule that heirs only have to pay the capital gains tax when they sell the asset? You inherit a stock worth $100,000 with a basis of $25,000, you don't have to pay any estate or inheritance tax (or it falls under a generous $11.7 limit), but if you sell the stock you have to pay tax for the $75,000 gains.

I personally benefited from the step-up rule when my father passed away, and I'll admit I did not voluntarily give the government any money. But even then I recognized that there was something wrong with the law. From a tax perspective, several years of capital gains on some stocks was just erased as if they had never happened.

[gawaintheknight]

+1

Originally Posted by bigtrain

I can’t get worked up over a proposal that would raise the capital gains rate
on those earning over $1,000,000.00 per year.

[nolemmings]

I've stumbled upon a way to ignore the capital gains tax and my system has remained tried and true, mastered to the point that it's automatic. I just sell everything at a loss.

It's either idiot proof or proof that I'm an idiot--I'm not sure.

[egri]

Originally Posted by BobC

With the Tax Reform Act of 1986 they dropped the top individual tax bracket rate from 50.0% down to 38.5% on taxable income in excess of $54,000 for single individuals, starting in 1986. In contrast, the top individual tax bracket rate for 2020 is 37.0% on taxable income in excess of $514,800 for single individuals. And I believe the highest the individual tax bracket rate has been during this period from 1986 was 39.6%, with the lowest top bracket rate during this same period at 35.0%. So in truth the top tax bracket rate is actually lower today than it was about 35 years ago in 1986, and during those ensuing 35 years has never been more than 1.1% higher, at a top bracket rate of 39.6%.

As I noted above, the top individual tax bracket rate for single taxpayers started at $54,000 back in 1986, and has since risen to now starting at $514,800, almost 10 times what the top bracket rate started at back in 1986. Meanwhile, in looking up a few measures of inflation in time over that same 35 year period from 1986 to today I found:

The average annual inflation rate over that 35 year period is 2.55%

$1 in 1986 adjusted for inflation is worth $2.42 today in 2021

The CPI (consumer price index) in 1986 = 109.600

The CPI in 2021 = 264.877

Given all that, I think an almost ten times increase in the amount at which an individual starts to pay income taxes at the highest marginal tax rate over the same 35 year period as these inflation measures is not too shabby. So exactly where are you getting your data from that indicates that since the late 1980's that the top marginal tax rates have been going up, and that the tax brackets have been going down?

As for business owners potentially moving away from the U.S. if they begin to feel their tax burden is becoming too heavy, that is one reason that all the rhetoric spewed about having the rich and well-to-do pay an even bigger share of their income as taxes is just that, rhetoric, to appease a portion of the voting masses. The government knows they can't afford to completely alienate a good portion of their business community and its leaders, for fear they would pull up and move elsewhere. The business world has changed so much since WW2 with major leaps in technology, tranportation/logistics, computers and the internet, and the globalization of the marketplace. Companies that used to just worry about producing/providing for the U.S. market are now able to go global and easily reach and deal with customers and suppliers anywhere in the world. And that has become even more pronounced in the midst of the covid pandemic as companies and people started being forced to work more remotely than they ever had been before. And as a result, to pick up and move business operations and people to other parts of the world may not be as difficult and far-fetched as previously may have been thought. So now the federal government does have to pay attention to how they tax and treat businesses and their owners else possibly lose them to other countries. Luckily we are still one of, if not, the top consumer economies in the world. That will keep a majority of businesses from ever leaving due to the need to be here in the U.S. to fill our consumer needs. And then of course, despite all the negative things that have occurred in recent times, an overwhelming majority of Americans still consider this the greatest country on the planet and would rather live in the U.S. than anywhere else in the world. But despite all that, our government will likely still not go overboard with tax increases to the business community and its owners/leaders for fear of starting to change such pro-U.S. thinking.

My source is the IRS, Table 23. I can't link an Excel file, but it gives the tax brackets, and I used the BLS's inflation calculator here. I misspoke when I said tax rates stayed above 60% until the late 1980s; they went down below that in 1982. They bottomed out at 28% in 1988, then went up a few years later to 31%, up again to 39.6%, down a hair to 39.1%, then 38.6%, then down to 35% in 2003, still above where they were in 1988. Then they went back to 39.6% before going down to 37%, still above the 2003 level. For the brackets, the trend since 1913 has been that they get lower. Even after recent hikes, the cutoff for the top bracket, when adjusted for inflation, is below where it was in 1981.

As for the rhetoric about taxes, I'm not sure how far this can go before breaking the 'No Politics' rule here. A lot of it is coming from Janet Yellen, who doesn't have to worry about what "the voting masses" think, and the 1993 increase narrowly passed in the Senate, with the vote of the junior Senator from Delaware. The 2003 cut did not have his support. He also helped pass the 2012 increase, and has criticized the most recent cut. There is a willingness there to raise taxes in a sluggish economy, and oppose cutting them in similar circumstances. This is already playing out at the state level; the Wall Street Journal has been running articles for months about New Yorkers who relocated to lower tax states in the past year, while the state is contemplating raising its tax rates, already some of the highest in the nation.