If we could just buy and hold, there wouldn’t be a tax issue. Unfortunately, we’re not geniuses enough to know the stock can’t go lower, and Mr. Market is far too irrational to be trusted. So we use the Tools, get in and out with the big guys, and avoid the danger of holding in a market that can crash. Great. Except now the Feds can tax us.
As much as possible, it’s our duty as good citizens who intend to take care of ourselves in our wobbly old age to avoid paying taxes whenever it’s possible to legally do so. In fact, our government has seen fit to provide us with a vast array of tax loopholes we can use to defer taxes. These loopholes are called SIMPLE IRAs, Roth IRAs, SEP IRAs, 401ks, and Defined Benefit Plans (among others).
We can even set up a trust that’ll defer taxes for us.
Obviously, not all of the money all of us are able to invest is in a tax-free account. Some of us have more money to invest than Uncle Sam lets us put away in a retirement account. Some of the money you’re investing might be in a taxable account.
Let me summarize my feelings about taking your profit versus leaving it in the business for the long term to avoid short-term taxes. You can do the math and convince yourself that staying in for the long term is clearly the better choice, but I don’t stay in.
The reason I don’t is that a stock market that’s been overpriced for as long as this one may be in for a serious crash sometime. It doesn’t have to happen, because the past does not necessarily predict the future, but it certainly can happen, and if it does and you’re in for the long haul, the long haul just got very long indeed.
If you ride a stock down from $100 to $20 in a serious market meltdown, that stock has to go up 400 percent just to break even. Wouldn’t it make more sense from a risk perspective to just pay the taxes and take your gains off the table every time the big guys start to get out?
Look, I think it’s criminal that I can’t roll my gains over into another business in some reasonable amount of time. Why doesn’t Congress understand that every time it strips away 40 percent of my gains to pay for their little boondoggles, it removes from the investment pool capital that creates jobs?
Congress seems to get it with commercial real estate. You can roll that over in a 1031 exchange. So, if you can do that in real estate, why not in businesses?
I never saw a society get rich by building apartments and skyscrapers. Wealth is created by businesses that create products that make our labor more efficient. So how crazy is it to penalize investors in businesses and encourage investors in real estate? Real crazy. But those are the rules, so for now we have to play by them.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.