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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

#91

Post by JumpCrisscross »

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…

A fairer way to resolve this might be letting Renaissance pay the long-term while Deutsche pays at least the difference between the short-term and the long-term rates. If Deutsche Bank wants to pay Renaissance's taxes for the latter, that's fine by me.

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

#92

Post by jnordwick »

dragonwriter wrote: post #26
gohrt wrote: post #10

Earlier quoted context omitted.

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.

Financial instruments come in a variety of flavors the tax treatment is definitely arbitrary and not possible to be very consistent or logical about.

1- Over the course of a year I buy and sell hundres of stock issues, constantly incuring taxable events, and at the end I sell off the entire portfolio including short term cap gains rate (same as income rates).

2- I buy an ETF that does all the same trades, but when I sell I only get long term cap gains taxes.

3- I loan a company money (sell an note) to do this trading and a clause written for at the end of the year call the note for a value equal to the previous two scenarios. I incure taxation from a bond investment,

4- I buy an ETN (exchange traded note) that repays based on a formula as if the previous trades were made. Once again I pay long term capital gains on an equity investment.

5- I buy a future on the index I'm managing and invest an an amount equal to current price of the stocks in bonds to replicate the price performance on the ETN. When I sell a year, I incure two taxable events.

6- I have't even brought up options, so I can keep going.

These are all the same, but they all have different taxable events and consider a realized gain something different.

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

#93

Post by ska »

ska wrote: post #18
pcurve wrote: post #14

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

I don't see how that is more artificial than taxing cap gains at a different rate than salary, or any number of other examples in the tax codes. All of these things are done to change the incentives about something, you can't expect them to be consistent without reference to those goals (and even then...)

really? I'm honestly confused at responding to this with downvoting.

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

#94

Post by madez »

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…

    “A retail business (...) sells it's stock”
How is this to parse?

The contraction “it’s” means either “it has” or “it is”. So, the quoted expression expands either way to a syntactically malformed expression with two verbs.

Could it be intended to mean the following?

    A retail business’ (...) sells — it has stock

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

#95

Post by charlesdm »

tanderson92 wrote: post #79
charlesdm wrote: post #72

Earlier quoted context omitted.

And then you go to court and ask a judge, who is (in general) a neutral party, to interpret the law based on the situation and ask what the correct course of action was. I guess people have different definitions of evasion, but I would probably define it as having the intent to evade taxes "from the start". As a citizen (or a corporation), you are free to decide on your own interpretation of the law. Tax authorities…

> I would probably define it as... The legal standard for proving tax evasion disagrees with you.

Well, then you just need to make sure your interpretation of the law is more correct than the one of the administration. :-)

Innocent until proven guilty?

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

#96

Post by kbenson »

dtparr wrote: post #84
ovi256 wrote: post #73

Earlier quoted context omitted.

They could have done that much better with linear interpolation instead of a step function. Today's step function, with made-up tax percentages: 20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute. My proposal, with interpolation: 20% if held for less than 6 months 10% if held for 18 months or more Between 6 and 18 months, we interpolate between 20 a…

That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.

Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?

I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.

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

#97

Post by brownbat »

eli wrote: post #20
gohrt wrote: post #10

Earlier quoted context omitted.

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…

The difference is the people who make the tax rules want to encourage one kind of behavior over another, regardless of anything else. You're free to think that's a fundamentally bad idea, but it isn't "arbitrary," it's the basic idea of Behavioral Economics.

Well, just to caveat, not everyone who makes the rules is a pigouvian. Some arguments over taxes are actually about finding ways to maximize revenue while minimizing distortions. It's a mix.

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

#99

Post by s73v3r »

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…

Stockholders who hold less than a year are going to have very different goals for the company than those who hold for several years. That's the difference.

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

#100

Post by MaulingMonkey »

kbenson wrote: post #96
dtparr wrote: post #84

Earlier quoted context omitted.

That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.

Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports? I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.

> Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports?

I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B.

Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive.

Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held".

[1] At least, I think I read they were required to start tracking this.

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