Is the tax rate 40% if the capital appreciated stock is sold?
Actually, it could be more than $160M, but I will not get into the financial math.
However, the real question is has the IRS and government shown the fiscal discipline and acumen to be even worthy of giving them that money? That is the question that I believe answers itself.
@texaspg, Depends what your marginal tax rate is.
@texaspg, If appreciated stock is sold, the basis rises to market value so there are no capital gains. No capital gains tax on the stock that is gifted.
So…playing with smaller numbers, you pay $5,000 For shares of stock. The stock appreciates to $50,000. There is a $45,000 capital gain if you sell and a capital gains tax based on your income.
But…if you just donate the stock to a place like Stanford, there are no longer capital gains and therefore no capital gains tax. You also get to deduct $50,000 from your income when paying income tax. If your marginal tax rate is 40 percent, your taxes decline about 40 percent or $20,000.
If your marginal rax rate is 25 percent, you save $12,500 in taxes.
Depending on your situation, it mat be advantageous to donate appreciated assets to Stanford instead of selling that asset or giving cash.
My crystal ball sees donations to Stanford from @texaspg in his future.
Discus this with a CPA.
I hope this makes sense.
@texaspg, if you lived in a state with an income tax, your tax savings would probably be higher.
Phil Knight could have bought a $400 million Italian yacht instead and all @dstark and friends would have gotten is the sales tax. Do you guys realize that these donations (that for the most part are NOT appreciated stock) the IRS and the government wouldn’t get any of it if it was spent on a boat, some nice cars, or placed in a trust for their progeny. These donations for the most part are not costing you anything. Nobody is donating a dollar to save 40 cents.
Knight, Zuckerberg, et al… couldn’t care less about the deductibility of their donations. They have armies of tax lawyers and accountants creating complex structures to protect them. For the average doner like me though the deductibility is nice little incentive. But again I could just buy a Porsche and you wouldn’t get anything. I already paid tax on my earnings so you already got your pound of flesh.
@dstark probably not since I still have about 8 more years of college payments for 2 kids.
What I was asking was if I collected 45k in longterm gain from your example, wouldn’t I be paying only 20% in tax instead of 40%?
You will not be paying 40 percent. Depending on your income you may pay 20 percent. If your taxable income is above $250,000, you may also have to pay a medicare tax. I can’t remember what that tax is. Maybe 3.8 percent.
Let us make it large numbers so there is no confusion. What if my capital gain is 1 million or above. Will the Government still get 23.8% or more?
Hedgefund owners/managers used to pay only 10% although it was their income was the big complaint at one time. Someone told me those numbers are now 20%.
All I am trying to figure out is whether the Government is truly losing out on 40% or a much lower number based a capital gain sale instead of a donation or would have been only 10% when hedgefund managers kept donating 100s of millions to Ivies like this one.
“But again I could just buy a Porsche and you wouldn’t get anything. I already paid tax on my earnings so you already got your pound of flesh.”
The tax you paid on earnings IS what the IRS gets. If you buy a Porsche, you do it with after tax income. If you give it to charity, THEN the IRS gets nothing bc it is deductible, or out of pretax income. And don’t kid yourself that billionaires don’t care about the deductions/tax impacts. That is largely what makes them billionaires!!
@texaspg, the answer to a couple of your questions are complicated. 
Speaking generally…
If you have an asset with a capital gain of over $1million and you sell that asset, yes… The capital gains tax will be 20 percent plus 3.8 percent.
I am not sure about the 10 percent. I was a trader and I consulted for a trading firm. I don’t remember getting the tax rates down to 10 percent. Some things hedge funds are doing are beyond my knowledge or expertise. I can’t say yes or no on this. Depending on the situation, a long term capital gains tax rate of 20 percent plus the medicare tax can be achieved.
The top Capital gains tax rates were increased from 15 percent to 20 percent plus the medicare tax. That does increase tax rates for owners of hedge funds so their tax rates are probably higher now. The average tax rate paid is more for higher income people since the tax rate hikes.
The government does not lose 40 percent based on a an appreciated asset compared to a cash donation. You’re mixing things up. The government loses the capital gains tax. In addition, there is a deduction that can be 40 percent or so of a value of an asset depending on the donor’s marginal tax rate. The donor gets that deduction whether he donates cash or an appreciated asset.
Schwarzman is so wealthy. He doesn’t need to sell assets. He has trusts. When he and his wife die, the assets he owns are going to have a stepped up basis and capital gains taxes are not going to occur. Everybody with appreciated assets potentially gets this tax break. His tax break is a little larger. This tax break costs the treasury $40 to $50 billion a year but who cares.
@dstark - It looks like the ability to deduct a donation is reflected as having a much higher impact than the true cost.
A person deducts a million dollars as a tax deduction, people automatically assume the government should have gotten another 400k but if the same person paid taxes on the capital gains, the number is really much lower at 240k.
I think there was a period when long term gain was at 10%, moved up to 15% and now 20%.
It is always a lower number than 40% for people who know what they are doing, and these guys know what they are doing. Once W2 are out of the way, i.e., not part of the tax equation, it is easy to be below 40%.
There is no tax if the asset is not sold, and then tax is only on capital gains. Therefore, unless it were deductible, the hedgefund manager would not be donating to the university. It would then be wiser to hold the asset and take capital gains and simultaneously offset with loses (which must exist) and thus have a tax rate somewhere below 15%. Easy to do.
Pure nonsense and mathematically impossible.
Billionaires became billionaires because they created something that millions of non-billionaires consciously or unconsciously purchase, and in many cases, keep purchasing over the longterm.
Simple math - unless one has money, one cannot tax deduct oneself into having more money. It is called a tax deduction for that very reason. as it is a tax reduction on money that already exists. The only reason a billionaire can take advantage of certain tax deductions is because he already has a $billion+. The tax deduction did not get them there, as it is only useful after they get there.
(Emphasis mine)
@texaspg, assuming the highest tax rates for both capital gains and income…
An appreciated asset is worth 1.1 million with a $1 million gain…
Its donated it to Stanford…
The donor saves $238,000 in cap gains and he gets a tax break of $440,000. Taxes saved $678,000.
Donor gives cash or sells the asset and then gives cash. No savings on cap gains.
Donor saves $440,000 in taxes.
In this example, the difference is $238,000 if the asset is donated.
Post 151, I used to do something similar to what is mentioned in post 151.
On a small scale though.
For example, Let’s say I traded futures. Profits in futures are taxed at a 60 percent long term rate and a 40 percent short term rate. Even if I am trading in milliseconds. 60 percent of the profits are long term rates. Isn’t this great?
I am in the top brackets. Let’s see how great this.
I make $100,000 trading futures and my expenses are $40,000.
I made $60,000.
So this is what happens…
$60,000 is taxed at long term capital rate of 20 percent.
The $40,000 short term gain and expenses cancel out. No more paying a 40 percent tax rate.
I am left with a long term capital gain tax of $12,000. $60,000 x .20 ( long term capital gain tax rate).
I trade in milliseconds and I am taxed at long term rates.
This is a great deal.
@awcntdb
Pure nonsense? Attention to these types of benefits are the hallmarks of billionaires…they don’t get rich by throwing their money away. (I was not being literal. You should loosen up and try it some time).
Did somebody purchase something from George Soros? Jim Simons? They are billionaires.
Billions of dollars of dollars in taxes not paid…
But billiionaires are playing games with the tax code so everything is cool.
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I think there was a period when long term gain was at 10%, moved up to 15% and now 20%.
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I am pretty certain that is not the case. Reagan got long term capital gain rate down to 15% in exchange of closing out bunch of loopholes in the tax code.
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A report (pdf) by the U.S. Senate’s Permanent Subcommittee on Investigations says more than a dozen hedge funds used “basket options” over a 15-year period to avoid paying hundreds of billions in taxes they would otherwise have owed to the U.S. Treasury.
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Well, where is stupid Congress. They can close this loophole (I am not even convince this is a legitimate loophole) by insisting that swaps and forwards should be treated like owning the stock/fund directly. And don’t even get me started on the stepped up basis and carried interest. I view myself to be very conservative but simply cannot find any intellectually honest justifications for these special tax treatments.
^ 15% was the lowest it went to apparently for highest income bracket. It went as low as 5% for lower income brackets.
https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States