Topic: Preparing for a capital gains tax increase (US) (Read 519 times)

Maybe you don’t know what the word “punish” means or maybe you just too easily post in anger, but the tax is very obviously not intended to punish the successful. You can be against the proposal but ranting in hyperbole doesn’t make your point look reasonable.

When you invest money in a stock, and the stock appreciates in value prior to you selling the stock, you will pay taxes on the gain in value you realized. Your cost basis (the price you paid) is not indexed to inflation, so if you hold onto a stock for a long time, your cost basis in terms of buying power could be much lower than it actually is.

Changes to fiscal laws (laws that change government spending and/or tax receipts) only need a simple majority to pass each chamber (assuming the President will sign the law, otherwise it will need a 2/3 majority to override a presidential veto), but there are limitations as to how many of these laws can pass each year. For the tax increase being discussed in the OP (or anything similar to it), all democrats would need to vote in favor of it, including moderate democrats, and those that are in Red leaning states. The changes to tax laws being discussed in the OP are part of the "infrastructure" bill being negotiated among various elected officials. I can't see Republicans signing onto anything this radical.

The purpose of the tax increases being discussed in the OP is intended to punish the successful. It is as simple as that.

I don't know what it takes to pass laws like this (I never paid attention in high school to whatever subject covered that), but somehow I suspect this will come to fruition for Biden.  My understanding is that this capital gains tax law is designed to tax the rich, but to me it's double taxation.  I earn money on which I pay taxes, and then I invest that money in an asset that grows in value--but I don't sell it.  I'm supposed to pay tax on unrealized gains?  That's fucking bullshit.

The government in the US is taxing its citizens to death while simultaneously printing money like there's no tomorrow, which all but guarantees out-of-control inflation at some point.  Think about it: there's income tax, sales tax, property tax, capital gains tax, inheritance tax--there are so many different flavors of tax that I'd have to create a list longer than all of our dicks combined just to include them all.

And even if this is aimed at the wealthy, you'd better believe it's going to trickle down to the middle class and the poor.  It always does.

My point was that donating money to a charity is not a tax dodge because there is no financial benefit to you in giving your money away.  Tax dodging is hiding income or under reporting your assets with the intention of keeping that money and not paying tax on it.  The difference is whether or not you keep the money.

It is rare that I end up responding to the man himself! However one thing I am wondering (serious question), if you are earning, and then you are paying taxes for what you are earning, then you do not stop and you end up losing money to taxes, isn't that a sort of good thing for the population? Sure horrible for you but sounds good for the population isn't it? I mean you DID make that profit, then you basically restarted again to make a profit and ended up a loss, that's normal.

If we didn't taxed people until they sell and get out, that would be basically someone buying a stock and not selling it until they die and that would make the community bad because there are people making tens of billions of dollars profit while not selling anything at all, which would be bad for the taxes. At the end of the day, I would prefer people to pay taxes on their profits, and if they want to sell and get out that's fine, if they stay in, aren't they taking that risk?

The US already has a huge government, the problem is not that the government spends too little.

Projections for 2021 :
Overlay 5,8 Trillions $
Revenues 3,5 Trillions $

I understand that people look at the grand scheme of things and assume that when government takes more taxes things starts to be bad, but unfortunately it is not about government in general, it is about which government that takes your taxes.

For example, in places like Russia or China or Cuba they claim to be communist but what is communism in idea? Shouldn't it be everyone be equal? Then why do we have people who are super wealthy beyond logic at the top, and people who work for few cents per hour at the bottom? How is that even equal? So USA citizens see these and think that government is bad, and I agree, THOSE governments are bad, so let's not go full on communism because obviously it doesn't work and never worked. But, how about European style capitalism?

I mean there are ton of amazing companies in Europe that makes billions upon billions of dollars profit, yet they have free healthcare and free education and social help to poor, which means capitalism and humanity can work together without becoming communism.

You're right, if someone were to realize capital losses in a year after they realized capital gains, they would not be able to offset the capital gains with losses. If your scenario is changed such that someone sold their AMC shares prior to the end of the year in 2021, if they sold their AMC shares at a loss, that loss would offset gains from 2021. Your scenario is somewhat similar to a trader who was had a $800k tax bill on ~$45k in trading earnings due to the wash sale rule (based on the facts presented in the article, I believe he probably qualifies as a "professional trader", which would exempt him from the wash sale rule).

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You bring up AMC as being a reckless investment...the price of AMC stock has gone from ~$2 to over $60 at its high. Nothing has changed regarding AMC's fundamentals this year, and if anything, AMC's long-term prospects are weaker than they were going into the pandemic as people will be content with not going out to the movies. I don't think those buying AMC stock are even speculating on it's underlying financial performance, but are rather using excess money from the government to bet they can make more money via the greater fool theory. There are many stocks with similar patterns. People are throwing money at NFTs like candy, that has no real value other than bragging rights.

My concern with the above is that a lot of speculative money has also gone into crypto. I believe bitcoin has real long-term value, but my concern is what happens once all this mania ends, and it will end, probably sooner rather than later. I think there will be a blood-bath with bitcoin (and other crypto prices), and it wont be pretty. It will probably spill over from a similar blood-bath in other asset prices.

There is an eviction moratorium right now, and millions of mortgages are in forbearance. This is while the unemployed have been receiving direct payments in the form of unemployment that is often greater than the wages they were receiving. The delinquency rates on rent, and the number of people on mortgage forbearance programs are not consistent with the unemployment rate, and the size of unemployment payments. It is possible that some of the money that should have been used to pay for rent and mortgage payments, instead went to things like AMC stock, NFTs, and other speculative investments. The only way I see near-term deflation is if these rent and mortgage payments need to be repaid on a large scale, and people start cashing in their "investments", and the price declines from these investments spills over into other asset prices like commodities and homes. I think it is unlikely the mortgage payments will need to be repaid immediately because the GSEs will likely allow homeowners to essentially turn 30-year mortgages into 31-year mortgages, and to pay the year of missed payments after they would've normally paid off their mortgage. Delinquent rent payments might be a different story, but I think many landlords will be willing to forgive back rent in exchange for renters moving out to prevent their units being tied up by non-paying renters.

Commodity prices are through the roof. These prices are not heavily factored into CPI inflation numbers because it is rare for a consumer to directly buy steel or lumber. Over time, these prices will have to result in higher prices at the cash register for consumers. Companies have been able to draw on their existing inventories of commodities they use to make their goods, and otherwise absorb price increases, but this will not last forever.

If only I had Merit to give!


If we look back 250 years to the US founder's original intent, we'll find that they really put a great deal of knowledge and innovation into writing what boils down to a phenomenal AnarchoCapitalist framework. Unfortunately, over the last 150-175 years it has been chipped away, bit by bit, until we barely have any restraints against tyranny left.
"A Republic, if you can keep it..."

I think most of the people on earth today don't really know what they want, but we should at least come to the stage when 20% percent of people know exactly what they don't want, by not repeating past mistakes.
The more time goes more I think we are sliding in some dystopian future but I am hoping there we be some split and people will have to choose to stay and live in totalitarian global dictatorship or outside in some anarcho-capitalist and other type of communities.

Anyone who checked official inflation stats could see how they are rigging the numbers to make them look better, so they say inflation is only one or two percent but in reality look at the prices for
Steel +145%, Lumber +126%, Oil +80%, Corn +69%, Coffee +34%, Wheat +25%...
Artificial global lockdowns destroyed everything and they are the last nails in this global reset coffin, but hey at least we can blame it all on corona and save the earth from carbon we breath out and produce all the time.

Imagine that you made $2 million in long-term BTC gains by buying in March 2020 and cashing out 100% during the highs of 2021, and then you decide to put all of your money into shares of AMC. Then you realize in April of 2022 that you owe over $800k in taxes. At that point it's too late to apply capital losses, since it's now the year after you made the gains. Capital losses don't carry backward at all, and they only carry forward a very small limited amount per year. In this scenario, you have to hope that your AMC shares are still worth at least $800k, or else your net worth will probably now be negative.


I'm very curious to see how it plays out! These are unprecedented economic times in many ways.

I don't think there is any proposal to eliminate the ability to offset capital losses to capital gains, so someone who invests recklessly, and loses a large portion of their fortune would be able to use those losses to offset any gains they had from earlier in the year. If they spent a portion of their fortune, and subsequently recklessly invested in something, this might be a different story.


It is far more likely that inflation will exceed norms to the upside than it will to the downside. There are currently shortages of many things that help produce goods/services (commodities and labor), and there is a pent up demand for discretionary, and non-discretionary goods/services due to massive government stimulus in the form of direct payments, and via low interest rates that have pushed up asset prices, and lowered mortgage payments.

The economy contracted in 2020 via artificial means (lockdowns) by too much, and there is too much pent-up consumer demand (due in part to direct stimulus payments, and enhanced unemployment benefits payments) to expect a recession in the immediate or near term. The US may see a recession in the medium term resulting from stagflation, and crazy economic policies implemented by the Biden administration.

It can be used, I just felt like never talking about it. You know how in fine arts world, they sell some works of some artist that doesn't have any talent? They sell it to rich people and the rich people have a connection with some famous art appraiser and they will appraise the work at an exorbitant amount to cover the bribe for the appraiser and then the rich guy donates it for the overly appraised price and he will be able to do a write since it was counted as a donation.

Update: Biden released a proposal which would make the tax increase retroactive to sales made on or after April 28 of this year. However, I consider the chance of this actually making it into the final bill to be very small: probably less than a 5% probability. It's still a risk, though. If this goes through, there are probably several newly-minted crypto millionaires who will go from millionaire to ~broke due to realizing a lot of gains, not planning for an absolutely huge tax bill which isn't even law yet, and spending or recklessly-investing all of their gains...

Some people (eg. Cathie Wood) seem to think that the capital gains tax increase is no longer likely, but I don't agree at all. I still think that some increase is quite likely, with the same probabilities as I listed in my original post.


I don't think that the spending so far is beyond what the economy can endure, so I think that the "bill" will more likely be paid as stagnation and low growth over many years rather than continuing inflation. The deflationary forces (technology, the reduction of labor's value/importance/leverage, demographics, government drag, etc.) are very strong, so while lasting inflation is definitely possible, and government action can definitely cause it if they keep pursuing ultra-inflationary policies, 3%+ inflation lasting many months is not my base case, and if it did happen, it'd probably point toward some sort of more catastrophic economic breakdown. Later this year, I expect (but not with very high confidence) CPI to surprise the market to the downside, and the US may even enter a recession.

(Economic stagnation is probably a good environment for the BTC price, BTW. Though there are other downside risks that could certainly offset this.)


No: I'm an ancap, so I'd work toward ending the state entirely. Exactly how this would be done would depend on which ridiculous hypothetical is under consideration. In any hypothetical scenario with even a dash of reality thrown into it, I'd be very likely to at least mostly fail to end the state; if for example there was a military coup and they named me emperor from out of nowhere, I'd almost certainly be assassinated within a week, and in any case I'd probably largely fail to effectively take advantage of the situation due to lack of the relevant skills on my part.

Anarcho-capitalism probably can't be achieved unless/until at least 20% of the population has some understanding of it and believes that it could work and be an improvement. So it's not happening anytime soon.

Two of the biggest problems with modern politics are:
 1. Government interference in everyday life has been relatively less in the last couple of generations than in the past, and so people have forgotten how much government sucks. People have also spent the majorities of their lives in government-run institutions. As a result, people believe that the obvious solution to any problem is for the government to solve it. While the government can solve many problems, it always does it extremely inefficiently, so too many government "solutions" drag down the entire economy. And if solving the problem requires deciding between trade-offs or competing interests, as is often the case, then the government "solves" the problem in an arbitrary and usually very unfair, unethical, and irrational way. People want to solve every problem with the government, but the more this actually happens, the worse things get.
 2. People believe in democracy as a goal unto itself, but too much democracy gives poor results. Making things more and more democratic, as many people want to do, usually makes things worse and worse. The average person makes very poor policy decisions, in large part because it's rational for them to be ignorant of policy. (Who actually thinks that Joe Biden or Donald Trump are anywhere close to being the most rationally effective heads of the executive branch, for example?) There's also nothing about democracy which makes it inherently more ethical than any other form of state: it's still one group of people using violent aggression on another group to get what they want. Societies/states would be more effective if they had a more reasonable end goal in mind (eg. "increasing our citizens' wealth, freedom, and happiness"), and then they viewed any democratic elements of the state as merely a tool to get to this end goal. If "maximize democracy" is your end goal, then you're headed for dystopia.

If a state is to exist at all, I think the most effective situation would be for the entire culture to have intense skepticism of government, for the state to be run by a fairly entrenched "aristocracy", but for a democratic "safety valve" to be able to shake up the aristocracy when they get too comfortable and ineffective. You want to avoid the current situation in many Western countries where politicians can't feel secure for even a minute and so they always think politically rather than rationally. But you also want to avoid the situation in autocratic regimes where the leadership feels completely free to do absolutely anything they want on a whim.

.. By filling out your tax return, you yourself can deduct the amount that was spent on charity ^[1] But this amount cannot be more than 30% or 50% of your annual income, (% depends on the type of organization to which donations are addressed). As far as works of art are concerned, if my memory serves me, tax breaks are valid only if you decide to choose this type of donation, (in the sense that you can also enter the equivalent of the value of the paintings or other items of value you donated on your tax return). In short, it all comes down to expediency ... to donate money to charity, thereby pleasing your "amour-propre", or to pay taxes ..

Generally, if you're donating money to charity, you don't have the money in your possession anymore, so you're not evading taxes by using the donation to lower your tax burden.  This isn't a loophole, that's literally the intended purpose of charity tax write offs.  Also, you can't buy art to dodge taxes.  There's no tax write off for buying art.

Tax increases like this, which in theory are meant to screw the rich, only screw those who are on their way to getting rich.

Does anyone really think that the billionaires, the Rothschilds, etc. are going to get screwed much? Those who have billions in Real State or stocks are not going to sell, they don't need to, plus they get rents and dividends. If they need more money, they can borrow. If there is one thing these people are known for, it is for almost never selling and for minimizing the payment of taxes.

The one who is really going to get screwed is the one who, not being rich, invested in a company, or in bitcoin, or some crypto, and seeing that the price has risen a lot, wants cash out to diversify, because just as it has risen a lot, it can go down.

They have alread found a way to avoid these taxes legally because they have almost anything at their disposal, from artworks that can be used for tax write offs, to donations to charities and other shady ways they can evade taxes legally.

Republicans are motivated almost exclusively by fear, so there's no shortage of things Trump our any other demagogue would be able to exploit and rally the feeble-minded around.  The thing that drives republicans now is their fear that they're being replaced in the economy and losing economic and political power, which is why they fight so hard to undermine democracy now.  When they say "make America great again" they're necessarily invoking a time when white people had more political power.  They're so threatened by actual democracy they'll storm the the capital in an attempt to stop it.

I guess the first test will be paying the bill of the X$ a month given to people during COVID. And let us have no doubt, this bill has not been paid yet and will not appear evident until the money starts circulating full speed and creating the inflation that CB just cannot afford given the debt of most countries. Who wants to bet on when and how intense the bill shall be and how will affect the average joe with a mortgage larger than life?

You would abolish government and stay in place as dictator emperor like Caesar?

I think that modern government model is more corrupt than ever and it is doing more harm than good, but I wonder what would all the brainwashed people do without government and/or without emperor.
Many would probably die especially if they worked as government employees but ones who survive may build some new system that actually works better (at least for some time).

It seems politicians cannot see farther ahead than their own noses, a law like that will create an incentive to hold your assets forever, everyone but especially the powerful will make an effort to not pay as much in taxes, something which is natural especially when the level of taxation is so outrageous, the proposal is so out there that in fact I am wondering if this is not a case of Biden playing 3D Chess and wanting exactly this, is this an attempt to try to push the stock market up by reducing the supply of stocks on the market as no one wants to sell while at the same time they increase the demand by printing more money?

The price of bitcoin going up is not a problem, as it would mean that you have additional unexpected gains, and are better off tomorrow than you would have been today if you sold everything (or you were better off than you had planned).

The biggest risk to spreading out gains over time is that you cannot hedge your gains without risking having to pay taxes immediately. So spreading out gains over years means you must take price risk over the number of years you are spreading your gains over. In your example of selling $1 million worth of bitcoin over 10 years, if when you sell in year 2, the price declines by 50% (not uncommon to have this large of price declines), you will have lost $1 million, less your tax savings. Assuming that capital gains taxes increase by 20%, and only apply to capital gains over $1 million (the first million in capital gains are subject to the old rules), if you had sold $2 million instead of $1 million, and did not sell in year two, you would have an additional tax liability of $200k, and a net gain of $800k.

 
This strategy is risky for someone borrowing against a volatile asset such as bitcoin. If you borrow too much against your coin, the lender may force a sale of your collateral, triggering a large capital gains tax bill in a single year. For example, if you borrow 50% of the value of your coin, and in a year, the price of bitcoin declines by 40%, the lender may liquidate all of your coin in order to satisfy your loan, and you would need to pay taxes on any gains that you just realized. 


IMO, this is superior to most alternatives, and probably makes sense under most realistic scenarios in which capital gains taxes increases substantially. This might be modified so that not all of residual assets are used to repurchase bitcoin so some money can be used for living expenses.


It is never a guarantee any asset will continue to rise. This is not to say that it will not. IMO a bigger risk to medium-term prices is interest rates and inflation. If inflation rises over the medium term, the fed will need to stop QE, which will remove the amount of money in the market being used for speculation. Interst rates rising will mean the NPV of investments will decline, all else being equal.

We may someday... But it's a common problem for people to incorrectly act as though we live in a post-scarcity world right now, and thereby make disastrous plans. Even the Soviet Union often had this mindset, even though in hindisight we were much farther from post-scarcity in the time of the Soviet Union.

Our economy may be efficient enough nowadays that it might be able to survive giving everyone $xxxx/month, for example, though that would definitely reduce economic growth. And if this "free money" grows beyond the point where the economy can bear it, you'd see price inflation and shortages.


In the US, you don't have capital gains if the coins are just sitting around. But if you trade BTC for some other coin, or somehow trade BTC for stocks, or buy goods with BTC, then these are all taxable transactions, even if there was no fiat currency: you've earned capital gains equal to the fair market value of the non-BTC side of the trade. (This is not tax advice. Talk to a tax professional.)

A tax on unrealized gains and/or total wealth (which have been proposed in the US but aren't likely IMO) would be difficult, and would force you to sell. BTC is actually comparatively easy here, since many people have unrealized capital gains on things that they can't easily sell, like restricted shares, land, ownership in a private business, etc.


If I was emperor, I'd abolish government entirely (or as close as possible)... But if I was instead required to design an income tax system which would collect a specific amount of money each year, I think that I would make the capital gains rate the same as the earned income rate. I'd also eliminate step-up-basis with the estate tax, if I couldn't eliminate the estate tax entirely. Both of these things just seem unfair to me, and they distort the market. Why should people be incentivized to sit on assets for a year? How does it make any sense for bond interest to be taxed more than stock dividends? Why should stock researchers who spend 8 hours per day picking the right stocks pay less in tax than welders? However, I would also make these three substantial tax-lowering changes:

• Every year, you should be able to optionally report that your net worth (assets minus liabilities) was at least $X, and then you should get a credit depending on the inflation that year. For example, if the inflation rate was 2%, then you should be able to reduce your investment income (interest, dividends, and capital gains/losses) by 2% of $X. Inflation is basically a tax, and not having this credit discourages people from investing in safer investments; you need to at least beat inflation, and any gains are reduced by taxes, so you need at least ~4%/yr gain to just break even, which requires taking substantial risk.
• If you receive any dividends from a company that pays taxes, you should get a credit for your share of those taxes. For example, if you receive a $1/share dividend from AAPL, and AAPL paid $0.05/share in taxes, then only $0.95/share of your dividend should be taxable. Otherwise you're taxed twice: once at the corporate-tax level and once at the dividend tax level. Alternatively, just get rid of the corporate tax.
• Capital losses should carry forward with unlimited time and amount.

There have been periods of time where there was no favorable tax treatment for capital gains. It's never been nearly as high as 43.4%, but that's because the top marginal tax rate was much lower at the times when all income had the same tax rate.


True, in large part because people will use strategies like those I talked about in this topic.


They legally probably can be implemented retroactively, but I don't think they will be. It will probably take effect on sales starting Jan 1, 2022.

A question :

How can you pay capital gains taxes on something where you have not received any gains? Should Capital gains not only have an affect when you sell some coins and you receive the fiat value? (minus the purchase price)

Let's say for example I have 100 bitcoins and I keep that in a wallet. I only bought those coins and hoarded it, so I cannot pay taxes on something that did not generate any income for me.

I ask this question, because some governments want people to pay taxes on the bitcoins they own and not on the actual gain that they will receive when they sell those coins in the future. (They might even sell those coins at a loss in a few years, so then there will not be any profits or gain from those coins) 

Thx for some insights in the US system....

In our areas EU, it works differently... as different for each country....

If taxes becoming crazy, you still can consider some different areas etc

They should not be increasing the capital gains tax, taxes are already too high as it is.

As the economy progresses more things become free or at least widely affordable. My thinking about the future is that, if we do things right, we may as humanity reach a point in which our basic needs, even some of the advanced needs, will be covered by bot and AI workings. If that happens, many political ideas will become simply obsolete.

The only supporting evidence that I can offer for it is the fact that a few hundred years ago anyone who could live 70 or more years, did not have to suffer extreme pain, did not have to work hard (meaning long hours of really hard physical work) for their basic needs and had access to quite decent medicine would already be considered extremely prosperous, if not a king.

On the topic, of course Biden will have to negotiate, but that is already something quite different to what was happening in US before right? An he is not tweeting shit about all the guys that happen to disagree with him.  Just how I like it, boring, predictable, ... the older the better even at the cost of an occasional doze-off or a "where was I... yes... hold on...".

It is very very rare to see theymos in these parts of the forum, to start even a topic, to discuss something about USA, that is really a big deal if you ask me.

I believe the biggest chance would be the drop of course but you think Biden didn't consider that? That is the trick with the situation Biden is in and they are very aware of that. They give a huge number, a number they know will not happen, and then drop it to numbers they know will accepted and then everyone acts like "Biden wanted 43%!!! we dropped it to 30%!!!" whereas the current version is 23%, so it still gets higher, but everyone wins, Biden gets to hike the tax, republicans and manchin likes get to brag about how they dropped it a lot. That is the case here and that is the case in almost everything right now.

With the vaccination being free on healthcare is another topic for example where I think free healthcare will start, vaccination is free, maybe one more thing will get free, and then who knows, one day everything could be free. Step by step man, it is awesome.

You know perfectly well that he will never stand a chance without his twitter account, that is, if he manages to stay out of prison and out of debt. The hold he has on the RP will weaken during these four years if Joe is able to do something half-good with the economy which seems quite likely. I think he stands the chance of doing so and trumpism only works if there is fear of the supporting masses.

Edited to add:
Just to be clear, I do not support any particular party in the US, I just like politics to make some sense and be as boring as possible - and the more predictable the better.

Correct me if I am wrong, but accepting any of the options will suspend a long-standing provision in the US tax code, according to which, according to which, the tax on income on investments should be lower than on wages. In addition, the Biden administration's claims that the tax code update will ultimately bring trillions of dollars into the budget ... are wrong, (in the sense that in reality it will only increase the public debt). I immediately recall one well-known saying "everyone enjoys the rights in the constitution, but few people want to be responsible for paying taxes." One way or another, I still do not understand how a person who has worked in public service all his life can talk about social inequality ... (after all, the essence of these tax changes is precisely in this).

With the weak leadership from Sleepy Joe: border crisis, energy crisis, middle east crisis -> people will look for 2024 MAGA
That said, maybe Trump will revise this tax policy, so you guys can cash out in 2024.

Not a financial advice obviously

Taxing unrealised capital gains would be a really bad idea. There is a good reason why these are called "unrealised" right? It could come to the case that you would be forced to sell shares or asset to pay taxes because they have gone up. That would really be a shock to the financial world... people selling all at the same time at a certain point in the year, people not being able to properly keep a long term portfolio since they have to sell frequently, ...

I do not see that coming, it would mess up too much the 401k and other vehicles and create a serious issue for the financial industry.

Everyone expects the Bitcoin prices to go up for ever, so when the correction occurs (similar to what happened in 2014-15 and 2018), most of the users are not prepared. Given the fact that Bitcoin prices have gone up by 400% during the last 12 months, there is some possibility of a correction occurring in the next few months.

As Theymos pointed out, the tax increases can't be implemented retroactively. So for sales being made up to March 31, 2022 the new taxes are not applicable. If you were having plans to sell some of your coins in the next 2-3 years, then it won't be a bad idea to do it before the date that I mentioned earlier. Two reasons - 1. taxes are going to increase from 1st April 2022 and 2. Republicans are unlikely to win the 2024 elections.

Also, there is a proposal from the Democrats to tax unrealized capital gains. This is where it gets really scary.

Guess what, no financial advisor would give and advise and tell people that they should spend all the gains they had. And the majority of them would say to reinvest it so it won’t be taxable.

Taxation really is complex stuff. People could take advantage of it and break them, as well. And for that, I would suggest that people have to hire a great accountant to do the job. You can always have less tax without doing anything illegal. An accountant will handle it for you as there is a lot of tax options to help you ease it.

I don't se this tax gain getting passed in the Senate, to me it is just to make noise because of the campaign promises he made during election campaign. I read somewhere that some of these Billionaires are getting divorced because of this coming Capital gain tax to protect themselves, rich people are not stupid and if it happens to pass, they will find a loop hole around it

Oh my! Theymos is on the bear side! He is selling! And he says bitcoin will likely not quadruple in price this year!


Thank gods!

I think that the main point here is spacing and it has a lot to do with how much bitcoin you got and with your lifestyle. The scenarios would need to be adapted to each country and each individual capital tax gains, so it is useful even if the political context would be other. For me the key question is Are you going to be exchanging more than 400k or a million a year (if in US) to fiat? Most people will be already out of the hook looking at that one.

I am not so sure you can buy stocks without going through fiat. Happy to know if someone knows how as of today. OTC maybe... probably not even in that case. You can also go and live 5 years on a tax haven, become a resident and... pay almost nil - yep, not an option to everyone.

Context

In the US, President Biden is proposing to roughly double the top marginal long-term capital gains tax rate. The exact details have not been published, but at this point the rumors I'm hearing make it sound as though it would work like this: If you have capital gains (long-term plus short-term) higher than $1 million in a year, then each dollar over $1 million would be taxed at 43.4%. This is more similar to the Net Investment Income Tax rather than creating a new CG tax bracket; normally, your ordinary income basically shifts down the capital gains tax brackets for you so that more ordinary income causes you to pay higher CG tax rates, but from what I'm hearing, this will not be the case with this extra tax. The top marginal short-term capital gains tax rate would also increase from 40.8% to 43.4% on income above about $400k.

What actually gets passed into law may be different from what Biden proposed. All Republicans will vote against any tax increase, so each and every Democrat would have to agree to any tax increase. I watch politics very closely, and here's how I'd rate the chances:

• 30% probability: There is no LT capital gains tax increase at all. In the Senate, every Democrat up for reelection would prefer not to vote to increase taxes, since it will be used against them. Moderates like Manchin will be opposed to it because it hurts their moderate image. Even many deep-blue Democrats may be opposed to it in private because they represent places like Silicon Valley; I'd guess that the majority of unrealized capital gains are in deep blue states.
• 20% probability: Biden's proposal goes through basically intact. You may be surpised that I consider this so likely, since the moderate Democrats have a reputation for blocking big stuff like this, but the fact is that increasing taxes on people making more than $1 million is extremely popular, especially among the Democratic base, and if Biden and his allies choose to push hard on this particular issue, I'm pretty sure that they can get all Democrats, even Manchin, onboard. The question is whether Biden cares about this enough to grant the moderates a lot of concessions and spend a lot of political capital in order to force this through.
• 50% probability: Biden's proposal goes through, but with the rate reduced from 43.4% to 28-30%. This will help to appease the Democratic senators who would otherwise be opposed to it.

In any case, I expect the change to apply to sales made in 2022, not retroactively to sales made in 2021.

Spacing out gains

The proposed increase is only on capital gains above $1 million. If you have less than $1 million in unrealized gains, then maybe someday it will affect you, but probably no action is required now. If you have a few million dollars in unrealized gains, then you should consider whether you could spread these gains out over a few years to stay below the $1 million limit.

Spreading gains out is harder than it sounds. If you have $10 million in unrealized gains which you plan to spread out over 10 years to stay below the limit, you may run into problems like:

• Unexpected expenses may occur, such as unexpected medical bills. Or unanticipated expenses may be desired, such as deciding to move.
• The BTC price may go up, so now you're sitting on $100 million in unrealized gains. (A good problem to have in many ways, but a risk to consider.)
• The BTC price may go down, and this may cause you to lose faith in BTC and want to sell. If your $10 million in unrealized gains shrinks to $5 million because the BTC price got cut in half, are you going to be tempted to sell more, even at a higher tax rate? Relatedly, you might decide that other investments look more attractive than BTC, especially if you have a huge portion of your net worth in BTC. You won't be able to buy stocks with your BTC without realizing the capital gains, for example. Maybe now you don't think that this will ever be an issue, but trying to anticipate your mindset years in the future is very difficult.
• Tax laws may change. There was just a tax cut in 2017, for example.

Note that some services will give you a low-interest loan using your BTC (or other property) as collateral, similar to a home equity line of credit. This is a strategy commonly used by people like Jeff Bezos or Elon Musk who have most of their wealth in unrealized capital gains to avoid realizing the gains all at once. It's not a free lunch, though: you'll still be paying interest and fees.

You don't have to just sell all of your BTC and be rid of it forever. You can sell it to realize the gains, set aside the appropriate amount for taxes, and then immediately use the remaining dollars to buy back BTC. This is called tax gain harvesting, and it is a common tax strategy.

The value of waiting

For ease of calculation, in this section I will assume that the capital gains tax rate is increasing from 23.8% to 43.4% on all capital gains, not merely on amounts above $1 million, and ignoring tax brackets. Also, when I say that you are "realizing gains", I mean that you are doing tax gain harvesting: selling BTC and then immediately using the cash minus taxes to buy back BTC.

Let's say that you have some BTC with zero cost basis, now worth $1 million. So $1 million in unrealized capital gains. If you realize it now, you'll have $762,000 leftover. If you realize it this time next year and the BTC price is the same, you'll have only $566,000 leftover. Not great: you should've realized it this year.

However: If you realize your gains now and the BTC price quadruples, you'll have $3,048,000. Realize the remaining gains on that and you're left with $2,055,876. If the BTC price quadruples, and then you realize the gains, you'll have $2,264,000. It was better to wait to realize the gains in this example, though here we're assuming a pretty incredible quadrupling of the BTC price in 1 year.

If the BTC price ends up rising faster than the rate of inflation on average, then it may be worthwhile to wait to realize your gains. However, especially if the tax increase is as significant as Biden proposes, you might have to hold onto your BTC for decades in order to break even, depending on how much/quickly BTC rises. And if BTC rises slower than the rate of inflation, then all else being equal, it'd be better to realize your gains sooner. Nobody can predict with much accuracy where you, your mindset, Bitcoin, the tax system, the dollar, etc. will be in 10 years, so I caution against cavalierly making plans stretching decades into the future...

In the previous example where the BTC price quadruples, I'll say that the "holistic tax rate" is 1-(2055876/4000000) = 48.6% for the strategy of realizing gains now, and 1-(2264000/4000000) = 43.4% for the strategy of waiting until the BTC price rises 400%. This holistic tax rate takes into account both the actual taxes paid and the gains lost-out-on by selling sooner rather than later. Note that the holistic rate for the waiting strategy is the same as the 43.4% nominal tax rate.

I calculated the "realize now strategy" holistic tax rates for certain potential future tax rates and after-inflation BTC price increases:


Ignoring tax brackets/limits and ignoring/assuming many things about the future, your circumstances, etc.: It'd make more sense to realize gains now rather than wait if the holistic tax rate in the table above is lower than the nominal tax rate on the left. For example, it'd be better to realize gains now if you think that the tax rate will rise to 43.4% and you think that BTC will increase by 150% by the time you want to sell, because 34.8% is less than 43.4%. But it'd be better to wait if you think that the tax rate will rise to 30% and you think that BTC will increase by 400% by the time you want to sell, because 40.9% is greater than 30%.

Use the table/formula above only as a very rough guide. I totally ignored brackets, limits, cost bases, etc. in the above calculations, but these are very significant and should definitely be accounted for. You should do your own calculations taking these into account, as well as your personal circumstances. You may have state capital gains taxes, for example, and some states are even considering increasing these on top of the possible federal increase.

Also, importantly, the BTC price increases above are after inflation. If BTC increases to $1 million in 10 years, then that's a 2000% increase from $50k pre-inflation, but a 1562% increase after inflation if inflation averages 2.5%/yr over those 10 years.

I am not a tax professional or financial planner. This is not tax or legal advice.