What's Wrong With This Scenario?

[DeletedUser394]

Excerpt from a book;

On occasion, a hotshot trader makes an investment that generates tons of money, only to find come April 15 that the earnings are classified as income and the expenses are classified as capital losses. With no expenses to deduct, the investor finds that the taxes more than offset the realized profit. This situation is rare, but it happens. Allow me to illustrate. The following table shows the pre-tax profit on this investor's initial investment:

Initial Investment: $1,500
Ending Value: $2,000
Pre-tax profit: $500

The $500 represents the ending value of the investment less the initial investment. The next table shows how the taxes affect the investment's profit, less income taxes due, when the costs are capital and the profits are income:

Profit for tax purposes: $2,000 (1,500 cost disallowed)
Income taxes due at 33% rate: $660
Realized profit: -$160

..............Why in the world is your principle taxed? Is this standard?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MJ DeMarco]

Not sure how you come to this ...

The $500 profit is classified as a short-term capital gain and will be taxed at marginal rates ... this is for the USA. If your marginal rate is 15%, the tax will be $75.

 

[DeletedUser394]

That's what I thought too. But here's some more of the excerpt:

Taxing Ordinary Income

Many investment gains are classified as ordinary income. Income is money that an asset generates on a regular basis - for example, interest on a bond, dividends on common stock, or rent from a commercial real estate stake. You report this income on your taxes, and you pay the same rate on it that you pay on earned income from your job. The good news? You can deduct any investment interest you pay, such as interest paid in leveraging or short-selling strategies.

The government taxes dividends, or payouts of company profits, at a lower rate than other investment income because the company that issues the dividend has already paid taxes on its profits before it issues the dividend out of what's left over. Many companies pay their shareholders small amounts of money out of their profits each year. In 2005, for example Johnson & Johnson shareholders received $1.32 in dividends for each share owned. The maximum tax rate on dividend income as of this writing is 15 percent.

A hedge fund that generates much of its return from interest income carries a higher tax burden than one that generates return from dividend income or from long-term capital gains.

(and then you insert the first excerpt that I posted)

 

[andviv]

I've heard of that same scenario before, but I simply was never able to understand it... makes no sense at all to me.

Maybe one of the tax experts here can explain that in lay terms and avoid the oversimplification that news media sometimes make to get your attention to read their news....

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[GlobalWealth]

Initial Investment: $1,500
Ending Value: $2,000
Pre-tax profit: $500

I'm with MJ here. I'm not sure where you are getting this info.

If you held this investment for less than one year, it would be taxed at the short term capital gains tax rate, which is your personal income tax rate. Like MJ's example if you are 15% tax rate, you pay $75. If your tax rate is higher, ie. 28%, then you pay a bit more based on your total income (I'm too lazy to create a scenario and do the math).

If you hold this investment for over 1 year, this is long term capital gains and taxed at a flat 15%, or $75.

 

[Red]

Just like posting content online, there is no rule as to what expert and/or idiot can publish a book. I see so much mis-information online (and occasionally in books) from proposed real estate "experts" that it's laughable.

Just one more thing to drive home the point: do your research & and then research your sources. Paying a licensed expert for their time and advice (who was personally referred to you) is often a good investment.

 

[CommonCents]

I sold a house years ago for around 150k. I later got a tax bill from the IRS for the exact same amount for what I sold the house. Gee thanks. They even threatened to levy. WTF! Had to hire a firm to make them stuff it.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.