According to Investopedia, Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price…Whether buying a security qualifies as investing or speculation depends on three factors - the amount of risk taken, the holding period, and the source of returns.
A Wall Street Journal article entitled Tax-Efficient Investing: Why is it Important?, makes two important points:
- When it comes to investing, it's not just how much you make that matters—it’s how much you keep after taxes.
- The Schwab Center for Financial Research examined the long-term impact of taxes and other expenses on investment returns and concluded that while investment selection and asset allocation are still the most important factors affecting your returns, minimizing taxes and other costs isn't very far behind.
CAPITAL GAINS TAX
Stocks, bonds, real estate, crypto currency and other similar assets are called capital assets. For income tax purposes, a capital gain is the difference between what you paid for a capital asset and what you sold it for. (Assuming of course that you sold it for more than you originally paid for it). For example, if you purchase stock for $10,000 and sell it for $15,000, you have realized a $5,000 gain which is taxable.
There are two types of capital gains—short-term and long-term. Under present tax law, a short-term capital gain occurs when an asset is held for less than a year before it is sold. Long term capital gains are realized when an asset is held for a year or longer before it is sold.
“Ordinary income” refers to any salary, wages or fees we receive. Currently, short-term capital gains are taxed at ordinary income rates while long-term capital gains are taxed at a lower rate.
Couples making $80,000 or less pay no federal income tax on long-term capital gains but are in the 12% to 22% ordinary income tax bracket. Couples making between $80,000 to $496,600 pay a long-term capital gains rate of 15%, compared to between 22% to 32% ordinary income tax rates. Couples with incomes over $496,000 pay a long-term capital gains rate of 20% compared to 35% to 37% ordinary income tax rates.
If the stock that created the $5,000 gain was sold less than a year after it was purchased, then the gain would be taxed at the seller’s ordinary income tax rates. If the stock was held for one year or more, then the seller would pay no federal tax if their income was under $80,000; $750 (15%) in federal tax if their income was under $496,600 and $1,000 (20%) for people with incomes over $496,600.
HISTORY OF THE CAPITAL GAINS TAX
Since the passage of the 16th Amendment and the introduction of income and estate taxes, the income tax rate on capital gains has changed often. According to this article published by the Motley Fool:
- With the exception of pre-1941 and 2004-2012, maximum capital gains tax rates have regularly been 20% or higher.
- between 1970 and 1979, wealthy taxpayers paid between 30.2% and 35% on their capital gains.
- The current maximum rate of 20% is actually low compared to where things have been since 1941.
This tax went into effect on January 1, 2013. It is a 3.8% tax applied to investment income when total income exceeds $200,000 for single taxpayers and $250,000 for married couples. This generally applies to any income from capital assets—rent, dividends or gains from a sale.
Like all of these income tax provisions, it is complicated, so the IRS has posted a 20 page document that provides instructions on how to calculate the 3.8% tax.
PRESIDENT BIDEN’S PROPOSALS
Bloomberg reported that President Biden is soon going to propose increasing the capital gains rate from 20% to 39.6% for people making over $1 million per year. When you add the 3.8% net investment income tax, these people will be paying 43.4% on their capital gains under Biden’s plan.
An article in the Wall Street Journal attributed the recent drop in stocks to worries about these significantly higher capital gains income tax rates. The article stated:
- The S&P 500 fell 38.44 points, or 0.9%, to 4,134.98.
- The Dow Jones Industrial Average dropped 321.41 points, or 0.9%, to 33,815.90.
- The Nasdaq Composite slid 131.81 points, or 0.9%, to 13,818.41.
- All 11 sectors of the S&P 500 traded lower on the report.
- Technology and other growth stocks were some of the biggest losers. Shares of Micron Technology, Twitter and Western Digital dropped more than 4%.
The Ruling Class and their minions in DC are using their ability to manipulate the capital gains rates as yet another way to control us.
Again, the bureaucrats in D.C. believe, with no basis in fact, that if they do a computer model, all of us will obediently act like the model says we should and their rate increases will result in a corresponding increase in revenue. However, can anyone point to a time when the wealthy just meekly allowed their wealth to be confiscated? The wealthy have the resources to hire the best professional help and shield themselves from the full brunt of the proposed increases. That’s something the computer models never seem to take into account.
Also, it is highly likely that many of the wealthy will respond to the proposed increases by selling their assets and taking their capital gains while the tax rate is still 23.4%. Of course, the DC group will decry that as unmitigated greed, but in fact, that’s just good, sound money management. When that happens, that’s going to put further downward pressure on the stock market.
The sad fact is that the above drama is totally unnecessary. This could all be avoided if the Ruling Class and their minions in DC would just adopt a sane tax system—the FAIRtax.
Here’s what one US President said about capital gains:
“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.”
Who said that? It wasn’t Ronald Reagan or any other Republican President. It was a Democrat. John F. Kennedy.
When the FAIRtax is enacted, we can make investments because they make sense and not be worried about “tax efficient” investing. Since there is no federal income tax there is no tax on capital gains and the gains are only taxed if they are used to make purchases of new retail goods and retail services.
It is time that Americans take control of our country by eliminating the income/payroll tax system. No more games that profit only the Ruling Class and their minions the politicians. ENACT THE FAIRTAX!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”