Look out: Capital gains taxes going up

Beware of market declines as the end of the year gets closer.

By Stock Traders Daily Nov 12, 2012 5:39PM

Image: Man with calculator ( Siri Stafford / Photodisc Red/Getty Images)Now that the election is over, everyone is talking about the elephant in the room. Our deficit and debt levels are outrageous and are causing the rest of the world to question our integrity as a nation. Although the U.S. dollar continues to be the reserve currency of choice for safe haven investors, many people wonder just how safe Treasury bonds can be when the United States continues to rack up trillions of dollars of new debt on what seems like an endless basis. 


With President Barack Obama back in office everyone expects some level of higher taxes and lower spending, but no one wants to see the fiscal cliff.

 

Touted by the media, the fiscal cliff has brought eyeballs to newspapers, financial websites, and business journals, but this coined phrase is not nearly as black and white as it may seem to the passive eye. Some people actually believe that if we avert the fiscal cliff everything will be fine, but many of those people are also forgetting about the elephant in the room. The fiscal cliff is a combination of higher taxes and lower government spending, we all know that, but the negotiations that might help us avert going over that cliff are also entertaining the same two economic headwinds.

 

In order to reach an agreement to avert the fiscal cliff, our government must reach an agreement on higher taxes and lower spending. These are each material economic headwinds that are coming very soon, whether we go over the fiscal cliff or not. In fact, I will go so far as to tell you that capital gains taxes will be going up next year. That alone should be reason to worry.

 

Of course, I also believe that other taxes will increase; I know government spending will also decline, but it is the capital gains tax that actually might be most important to us as investors in the stock market. Although buy-and-hold investors are still underwater from where they were in 2007 and even 2000 for that matter, proactive traders or other lucky investors who got in nearer the lows are holding significant capital gains. If capital gains taxes were to revert to normal income taxes the difference in actual after-tax performance would be significant.

 

For example, for every $100 million invested that is carrying a 30% gain, or $30 million in unrealized profits, the difference between selling at the end of 2012 versus any time afterwards would prevent an effectual doubling up on income tax. In this example, selling in 2012 could save about $6 million in taxes.

 

Unless you feel the economy is good enough to allow the stock market to continue to increase beyond these multiyear highs, a reasonable investment professional will seriously consider securing gains before the end of the year. Not all investors would do this, but enough investors are worried about it to rationalize lower market levels in the months ahead.

 

With that understood and in line with my macroeconomic work (The Investment Rate), which is much more dire than merely what the higher taxes-lower spending headwinds might suggest, I continue to advise all people to move their entire 401(k) positions to cash, sell all buy-and-hold investments, and for now we are still close enough to relative market highs to make short positions OK. Right before I wrote this article, I ran a real time filter for longer-term short ideas using the Long-Term Trading Filter Tool on Stock Traders Daily, and four stocks appeared prominent at the list: the Financial Sector SPDR (XLF), International Paper (IP), Cardinal Health (CAH) and PepsiCo (PEP).

 

If you follow these, use integrated risk controls because the technical patterns of the market tell us a short-term bounce can come. But the declines from longer-term resistance towards longer-term support have already begun, so increases from here will likely be short lived and the economic headwinds that are coming will change the sentiment on the street considerably.


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113Comments
Nov 12, 2012 7:42PM
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Where was all the "fiscal cliff" conversation BEFORE the election? It was mentioned but not with the current level of alarm. NOW it's a problem. Why?
Nov 12, 2012 7:57PM
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OBAMA SAID HE WOULD DO ALL THE LEFT WING SOCIALIST CRAP HE'S DONE SO FAR AND MORE AND PEOPLE STILL

VOTED FOR HIM NOT ONCE BUT TWICE! WAIT TIL OBAMA DEATHCARE KICKS IN AND SHORTAGES OF ENERGY AND

FOOD AND PRICES CONTINUE TO CLIMB! HIM AND THE DEMOCRATS WILL HAVE A NICE XMAS BUT THE REST OF US ARE

STILL SUFFERING FROM HIS FIRST FOUR YEARS! THE HURRICANE VICTIMS ARE PERFECT EXAMPLE OF INCOMPETENCE

OF OBAMA AND FEMA AND DEMOCRATS AND BIG GOVT! THIS IS WHAT YOU VOTED WELL YOU GOT IT NOW! SOCIALISM!

Nov 12, 2012 8:35PM
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I would advise anyone that has built up healthy capital gains to get out by the end of the year.......you can always get back in later. It is better to pay 15% now that 28% in Jan.
Nov 12, 2012 7:37PM
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"how safe Treasury bonds can be when the United States continues to rack up trillions of dollars of new debt"

 

It's all relative to the strength of other currencies of course. But, that doesn't make devaluing our currency the right thing to do for Americans, just because we can. If only Tim Geithner and Ben Bernanke understood that.

 

As for those Capital Gains tax rate increases; who cares? Thanks to the real estate market collapse orchestrated by Wall Street, I've got enough capital losses to offset my gains for the next three lifetimes. My effective Capital Gains tax rate is now zero. And no, that's not a good thing either.

 

Nov 12, 2012 9:21PM
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 If capital gains taxes were to revert to normal income taxes the difference in actual after-tax performance would be significant........For example, for every $100 million invested that is carrying a 30% gain, or $30 million in unrealized profits, the difference between selling at the end of 2012 versus any time afterwards would prevent an effectual doubling up on income tax. In this example, selling in 2012 could save about $6 million in taxes.

=====================================================================

 

First, capital gains cannot REVERT to normal income taxes, they went from 20% (not normal income tax rates) to 15%.  

From Wikipedia: The tax rate on long-term gains was reduced in 1997 via the Taxpayer Relief Act of 1997 from 28% to 20% and again in 2003, via the Jobs and Growth Tax Relief Reconciliation Act of 2003, from 20% to 15%

 

Second, given that above, selling off in 2012 to realize $30 million in gain

 will NOT result in a DIFFERENCE of $6 million, but a difference of 5% (20% - 15%) times $30 million = $1.5 million, yes, still a lot more money than I have, but if you consider that a working couple making a combined $90K is in the 25% tax bracket, someone getting $30 million for investing really shouldn't b1tch about paying 20%.

==========================

Finally, this writer says: " I continue to advise all people to move their entire 401(k) positions to cash,"

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Qualified retirement plans such as 401Ks or IRAs do not get capitail gains treatment, ever. There is no tax as long as the money is held in the accounts.  When any money is withdrawn, it is treated as ordinary incomes, always, not capital gains, a 15% vs. a 20% capital gains rate is a non-issue on withdrawals. So move all your money to cash, and then what, earn .5% interest with inflation at 2%-3% in the future. Seems to me that the stock market still did pretty good in the 1990s with a tax rate of 20%, how did it compare the last 10 years at 15%?

Nov 12, 2012 7:47PM
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Yep and in a little more than 4 weeks before Congress goes on holiday and they pass a temporary or permanent fix you'll be screaming buy, buy. You guys really love the uncertainty and volatility don't you.

Nov 13, 2012 7:51AM
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The media has created the term "Fiscal Cliff" to falsely convey to the uneducated American public that there is a choice. It is a form of fiscal denial (revert having to face reality). Americans want to believe we can keep spending and never have to deal with the results. As we move forward, there is no easy way out. Over time, the grim reality is we cannot solve our debt crisis without huge budget cuts and much higher taxes. And, yes, it will slow the economy. But no pain, no gain. This is a foreign concept to most Americans. 
Nov 12, 2012 11:37PM
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GO AFTER THE DAY TRADERS, NOT THE LITTLE GUY WHO BUYS AND HOLDS!!!

WHERE'S THE HUMANITY?

Nov 12, 2012 7:32PM
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Others have been questioning our integrity as a nation well before the FED induced fiscal suicide.
Nov 13, 2012 7:58AM
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Some of us were actually talking about the "elephant in the room" prior to the elections.  You know, real issues.  And the majority of the middle class voted to do something about it by voting for Romney.  It was the dysfunctional and uneducated created by 50 years of the "war on poverty" that provided narrow victories for Obama in Ohio, Virginia, Florida and Colorado. 
Nov 13, 2012 7:16AM
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The way you fools prance around a burning building just "fricking amazes" me. Hell yes the capital gains tax is going up with about 23 pages of other taxes after the first of the year not to mention other tax breaks being cut in half or eliminated altogether (but those aren't tax increases right? Yea right!) . So nice to see you "Jonny come lately" liberal Obama supporters getting on board with what Peter Schiff, Marc Faber,  and Gerald Celente have been saying all along!
Nov 13, 2012 10:56AM
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I don't want to hear it. You re-elected an administration that said they would raise taxes at any expense and a Senate that is either rejecting almost all proposals from the House or sitting on paperwork a mile high. Jefferson said it best..."The people elect a government they deserve". Aw well, I hate it for you.
Nov 12, 2012 11:53PM
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Wait. I have the answer. Let's just print another 16 trillion dollars? Let's make it 20 trillion to cover the next four years>


Nov 12, 2012 9:58PM
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Everyone writing on this issue seems to believe that you must abandon the market in order to recognize gains.  You can sell out, recognize gains, take your lower capital gains rate, buy back in, and reset your cost basis without abandoning the market.
Nov 12, 2012 8:19PM
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It is the congress that needs to be changed. Plain and simple. We can play the blame game till the cows come home but the same will be true. The do nothing Congress will just do nothing !
Nov 13, 2012 12:47AM
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Their comes a time when you have to pay the piper.  Credit card abuse. Bad rating and high interest.

 

Our government has the same responsibility. Face the truth and work to make it better. Capitol gains should better treated the same as any income. As a blue collar worker I am basically taxed on my time which I sell to survive.

 

Nov 12, 2012 11:41PM
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For all who favor an increase in the capital gains tax:  Imagine someone who is a good enough investor to double his/her investment every year.  Starting with $1, calculate how much money they would have after doing this for 20 years if there were no federal or state taxes.  Next, calculate how much money they would have after 20 years if after each year of doubling the money they would have to pay 35% (28% federal and 7% state) capital gains tax before they could again double their money.  I will save you the effort.  In the first scenario, the initial $1 would grow to over $1 million.  In the second scenario the initial $1 would almost grow to $23,000.  The math doesn't lie.  So please tell me why capital gains taxes are a good thing.  And if anyone thinks the taxes paid over those 20 years equals $973,000......
Nov 12, 2012 10:39PM
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in  a way its nice to be a little better than poor

dont worry be happy live cheap

 

Nov 13, 2012 12:29AM
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To KOO - Hey moron.......what planet do you live on?  You sure have a deluded sense of reality.
Nov 13, 2012 12:24PM
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To those asking where were these comments prior to the election I can tell you they were out there.  The main stream media did not want this out there because is would really hurt President Obama and the democrats.  This is not a party issue.  Both parties are to blame.  This is where the Tea Party comes to the front.  They have demanded no more taxes until we fix our spending.  That is unrealistic, since we need both tax reform (less deductions) and spending reform (no deficit spending).  Raising taxes to the Clinton era is part of the answer.  2% increase at all levels.  We must have the social security rate reinstated, 2% increase.  Then we will have to cut 10% of our spending annually.  Don't want to cut entitlements, go cut somewhere else.  Cannot cut military more than you already have.  By the way, any cuts in military spending will drive down GDP.  Sorry!
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