which activity deserves a lower rate of taxation?Follow

i voted same for both A & B as income is income. matters not how it is earned. if they both earn the same $$$ they both should pay on the same tax bracket.

it is no different then someone winning the lotto, compared to a CEO of a major corp. if they both earned the same (or close enough to the same) amount of income, they should both be in the same tax bracket.

the advantage the CEO will have is more tax write offs compared to the lotto winner so the CEO will still pay less money to the IRS in the end, but their "tax bracket" initially should be the same.

IMHO

Let's be clear about this: he isn't working. He isn't being paid in stock. He is just investing money (attained via unspecified means) and happened to make a profit this year.

I'll be honest, I voted B because I plan on being rich and want that cheap tax rate. Not that it matters, I'm Canadian and we have vastly different tax laws. Such as no taxes on lotto winnings.

Can person B write off the loss if he loses on the stock market and if so, at what rate?

Option 5: Anything Gbaji makes money off of and no one else. Ever.

I'm curious if even the 15% of people who believe you should get a tax break for investing would agree with the magnitude of the benefit which occurs now. Last time I checked, and posted it here, the rate of taxation was zero for the first $50k profit per year for "long term" capital gains (held 5 years, as I recall). Likely it is more now. And the maximum rate has fluctuated, but is vastly lower then income tax rate. It's about half the rate. I can understand some benefit, but this is crazy. As an alternative, I'd suggest allowing $10k per year of capital gains free of taxation and the rest taxed as income. It is a pretty sweet deal for investors, but it would be probably the largest tax increase in history.

This is not, however, the most egregious problem, which are stock options (as discussed in the thread about the poor). In this case, the owner of the stock option invests no money and has the option to buy stock at some point in time at the price some years earlier. There is no risk of loosing money. It's an option. If the stock price does not go up, the option is simply not exercised. Nor is it an investment, since the company does not have that money to invest. It is very much like a salary bonus. Glance through the forbes list of riches people around the world. Note the proliferation of high-tech new money. That is great! (Vastly better then, say, people who did nothing, but inherited it). But they did not have to pay income taxes on their money, which overwhelmingly came from stock options.

Absolutely false.

Without injecting some other economic contrivances (canceling capital loses for example), the "lowest rate" for capital gains is 15% right now. Previously, it was 20%, and before that (back during Clinton's administration) it was 28%. It has not been "zero" in the US at any time during the last century at least.

Some folks will attempt to play math games to make it look this way, but if you simply invest money, and get a return, the first 50k on that return is taxed at exactly the same rate as the next 50k, and so on... That's the point of capital gains taxes, the tax rate varies based on time of investment, not the amount you invested.

Since I put the down on my home by selling stocks, I damn well know that this isn't true.




Capital gains tax rate varries from "same as income" down to the lowest rate (15% currently) based on how long you hold the investment. Period. That's it. Now, I suppose technically, if you have a very low income you could end up paying zero tax on a capital gain, but that's not because of the tax rate, but because you've fallen below some minimum income level due to exemptions. Um... That benefits the working class guy retired on a 401k, not the ultra rich.



Well. Yes and no. You have the option to buy at a later date, so you can maximize the benefit. However, you have a set period of time to purchase the stock (10 years typically). Also, while receiving the option is not itself a taxable event, you still have to pay taxes on any gain. The vast majority of stock options are rolled over in a "same day" transaction (ie: I sell the stock option the same day I buy it, effectively buying the stock with the profit on the sale and pocketing the difference). Um... This is taxed as income, not a capital gain.

If you have sufficient liquid assets around, you *can* buy the options directly, but then you still have to hold them for a time period from the purchase date to determine the tax rate when you sell. The date you get the option doesn't count for purposes of capital gains.

What options really represent is a nice, but tax inefficient way for for middle income people to get into the market. People who cannot afford to buy significant amounts of stock might get lucky and gain some options that give them an injection of cash (at a high tax rate) that they can use to begin an investment portfolio.



Yup. This is exactly true. It's a salary bonus. In fact, I received 400 options this last review period, and I think 800 the period before. Another way to look at it is that it's a "bonus" that only provides benefit if the company does well. So if the company tanks, it's not out any money. If the company flourishes, it'll have to pay out the difference in the option price and some later stock value price when the recipient exercises his option. Um... But they flourished, so that's ok.

Again though, in most cases, the difference between those two numbers will be paid as income tax by the recipient. The only case in which it's not, is if the recipient exercises the option, buys the stock, and then holds it for X amount of time. At that point he *is* putting his money back at risk. The company's stock could tank in that time period...



Yup. Because stock options also serve as a great incentive for workers to work harder. Think about it. By having options, you've effectively become invested in the success of the company you work for. It's not just about "doing my job and collecting my paycheck". You actively want the company to succeed. This leads to much more constructive employees, who don't just do their job, but are more aware of how their job affects the company as a whole. Thus, they're less likely to do the minimum they have to in order to collect their paycheck.

The difference that causes in terms of productivity is huge. Stock options are a great tool IMO. While there is the potential for some tax silliness on the business end (Enron was playing around with some accounting tricks using options for example), the overall effect of options in positive IMO.

Yup. Because stock options also serve as a great incentive for workers to work harder

Not really. They're mostly for retention purposes. People hang around places until they vest, they don't work harder while they do.

I've accepted equity positions for contract work before, which makes virtually no sense from your arguing standpoint as nothing I'm going to accomplish in a few months is going to effect the stock price when I'm able to exercise them. I'm sure there's some accounting advantage to it, but was never interested enough to find out.

I would absolutely disagree with that. Employees of a company that provides them with options are intensely interested in the current stock price, the status of new development projects (even ones they aren't working on directly), the status of any litigation going on, regulations in the industry that might affect their company, etc...

It's a night and day difference when compared to businesses in which the employees simply collect a paycheck. I see this difference every single day.



Yeah. I'd assume it's just something to sweeten the pot (cause some might think it's worth more then it is). I'll also assume you didn't place that much weight on them when reviewing the contract, right?

I suspect that if you stuck around for more then a contract term, you'd "get" stock options a bit more. You're just not seeing the whole picture.



Sure. Because if you don't use them, you lose them shortly after your contract expires. If you do, you'll probably not make much extra money (and they get some of that as part of the "buy" you did). If you exercise them and hold them for some long term gain, they get the cash value now (ok, get it back technically), and there's no cost to them either way down the line.


From a purely accounting viewpoint, I'm not an expert, but I think there's some benefit they can gain because as part of the option process, they're shifting money from a liquid to solid asset type. If held over an accounting period, there may be some benefits in terms of how you report income to assets or some other accounting madness. Um... It'll also show up as stock activity, which may or may not improve their appearance on the market.


Let's just agree that accounting is a black art and leave it at that... ;)

I suspect that if you stuck around for more then a contract term, you'd "get" stock options a bit more.

I get it, I just think there's much less of an incentive to employees than you do. Maybe Qualcom is more generous with options grants than companies I've worked with, but relative to salary at most place, the option grants are short money.