Year 1, I own 10,000 shares at $0.1 each. I'm taxed 25% of $1000, or $250. Year 2, my super smart investment pays off and I own 10,000 shares at $100 each. I'm taxed 25% of an "income" of $999,000, or $249,750. Only, I don't have enough cash to cover the bill, so I sell about a quarter of my stock, leaving me with 7,500 shares. Year 3, the stock goes bust down to $0.2 per share. I write off a loss of $997,500? Does this mean I basically never pay taxes again?
So the end result is I paid a total tax bill of $250,000 on essentially nothing?
Furthermore, what if I decided not to sell my shares when they were worth $100 each and wanted to defer the tax bill. But now the price has crashed to $0.2, and I still owe a massive bill. Is that offset by my tax write-off?
Yes, you can keep writing off the loss in year 4, 5, 6, etc. until you’ve earned back $997,500. So another way of looking at it is that you prepaid $250,000 of taxes. Obviously not a desired outcome, but at least a reasonably fair one.
Also worth pointing out that under the current taxes rules the exact same thing would happen if you’d sold all your shares after year two and then invested all the profits into an ill-fated second company.
That sounds generally reasonable then. Except the pressure to sell stock in order to pay taxes. I don't know enough to know in all the ways this is bad, but don't you generally want to keep capital with the company that needs it?
Yeah the tax code generally tries to encourage holding stocks. So if it was just a question of the government getting the tax money now or later, I think most people wouldn’t want this.
However, the proposal is mostly to stop a specific tax dodge: stocks that are given as gifts/inheritance exempt both the giver and receiver from paying any capital gains taxes on profits from prior to the transfer. Combine this with tricks like taking out margin loans to fund expenses instead of selling stock, and someone can become a billionaire yet be paying next to no taxes
Year 1, I own 10,000 shares at $0.1 each. I'm taxed 25% of $1000, or $250. Year 2, my super smart investment pays off and I own 10,000 shares at $100 each. I'm taxed 25% of an "income" of $999,000, or $249,750. Only, I don't have enough cash to cover the bill, so I sell about a quarter of my stock, leaving me with 7,500 shares. Year 3, the stock goes bust down to $0.2 per share. I write off a loss of $997,500? Does this mean I basically never pay taxes again?
So the end result is I paid a total tax bill of $250,000 on essentially nothing?
Furthermore, what if I decided not to sell my shares when they were worth $100 each and wanted to defer the tax bill. But now the price has crashed to $0.2, and I still owe a massive bill. Is that offset by my tax write-off?