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I.R.S. Cracks Down on Hedge Fund Tax Strategy

nytimes.com

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Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#21

Post by tosseraccount »

gohrt wrote: post #10
chollida1 wrote: post #2

In my opinion this is a much better article on the subject. http://www.bloomberg.com/news/articles/2014-07-21/renaissanc... Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower. This obviously creates a situation where people will do their best to make their trading fall into the later category…

The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions. I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock? It's even the same word: A retail business sells its stock (product), and sells it's stock…

I buy a stock for $10. 2 years later, I sell it for $20. I get taxed on a $10 capital gains income tax.

How is this not "logical" ? Can you explain better?

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#22

Post by dragonwriter »

pcurve wrote: post #14

Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.

In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system.

Of course, irregular income from other sources that isn't simple hourly work often also can result in windfalls from work over a longer period of time, or naturally intermittent so that an a large income one year is the result of a pattern of activity that also resulted in a smaller income other years. A simple way to address this that isn't specific to capital income is to tax all income equally, but allow, within certain bounds, income to be recognized for tax purposes, and associated taxes paid, in advance of realization and, perhaps in certain cases, deferred and recognized over a period of years after realization.

This would mitigate any overtaxing of cashing out events that took many years to "earn" the income, without favoring any particular kind of income or creating gameable thresholds.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#24

Post by discardorama »

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades.

OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#25

Post by [deleted] »

gohrt wrote: post #15
tanderson92 wrote: post #7

Earlier quoted context omitted.

The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.

but OP's concerns don't matter. The Constitution's concerns matter. "Battery" is a crime. If the state decides that "smacking someone's back" meets the definition of battery, they can prosecute people who committed that act before the clarification, as long as a judge finds their interpretation to be consistent with the wording of the law. Law is not computer code that fully specifies a simulation in advance.

[deleted]

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#26

Post by dragonwriter »

gohrt wrote: post #10
chollida1 wrote: post #2

In my opinion this is a much better article on the subject. http://www.bloomberg.com/news/articles/2014-07-21/renaissanc... Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower. This obviously creates a situation where people will do their best to make their trading fall into the later category…

The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions. I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock? It's even the same word: A retail business sells its stock (product), and sells it's stock…

> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality.

Trading an asset vs. holding it is a non-fictional concept very much grounded in reality.

Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#28

Post by DannyBee »

ISL wrote: post #3

U.S. Constitution, Article I, Section 9: No Bill of Attainder or ex post facto Law shall be passed. How does that square with the article's "The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011." ?

1. In the US, the supreme court has repeatedly held that the ex-post-facto clause only applies to criminal laws (See Calder v. Bull, which was decided in 1798).

This is actually consistent with the history of the clause (It was understood to apply to criminal laws. Motions were made to change the wording to say it also applied to civil cases, they were turned down)

2. This is not a law, and may not even be administrative rulemaking (depending on what exactly they issued)

Of course, even if it was, you have a mechanism to challenge it if they hold you to it: the courts.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#29

Post by gphil »

discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#30

Post by JoshTriplett »

pcurve wrote: post #14

Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.

There's a massive difference between the long-term and short-term gains rates. And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.
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