Gyroscopic Investing

Am I correct in thinking that the 28% rate is applied to every cent of gains?  If so that is considerably more than most people's marginal tax rate -- so how does one properly account for this tax drag on the overall portfolio value during the distribution phase?  And also on the cost of rebalancing an Asset Allocation?

When you fill out the appropriate paperwork for holding a Canadian Gold Trust -- does that change the tax rate classification?

No. It varies by your marginal tax rate. If your marginal rate is lower than 28% then it is taxed at the lower rate. If it is higher, then it is taxed at the 28% rate.

craigr wrote: No. It varies by your marginal tax rate. If your marginal rate is lower than 28% then it is taxed at the lower rate. If it is higher, then it is taxed at the 28% rate.

There seems to be a lot of confusion about this. According to this webpage it is taxed as ordinary income if it's short-term, and either 15 or 28 percent if it's long term.....

http://www.bankrate.com/brm/itax/edit/t ... relief.asp

(P.S. - I hate it when you can't find the date published any where on a web page. This may not be timely information)

Yes. There is a lot of confusion about it. I believe craigr is correct, but I've yet to find any IRS document that confirms it

I'm quite sure it's your ordinary rate is ST, and lower of ordinary or 28% if long-term.

This isn't quite the "penalty" that people imagine it to be, at least not if you look at how it came to be.

There was a time that capital gains were taxed the same as ordinary income, which was at its highest at 28% at the time.  When congress started suggesting a rate-cut, the argument was that it would help create jobs to have more easy-flowing funds in business-investment.  I'd imagine it was dem's who then said, "ok, but lets have this be for qualified business investments, not sales of collectibles and trinkets that billionaires might own, pretending that will create jobs."

So there you have it... the rate for collectibles was kept at the ordinary rates... for some reason the 28% stuck even as top tax rates rose beyond that.

All-in-all, the real crime with taxing gold is the fact that it's not indexed to inflation (CPI) or maybe even not taxed at all.  I think not allowing people to offset part of their gains with inflation over the same period is quite inappropriate.

When you fill out the appropriate paperwork for holding a Canadian Gold Trust it is taxed as a long term capital gain according to your tax rate if you have held it for more then a year.
The advantage is that it is not taxed at the higher collectable tax rate.
The same information in the link below would also apply to GTU

http://sprottphysicalgoldtrust.com/Tax_Information.aspx

I thought it would be fun to write off the depreciation of the dollar on my taxes as a capital loss each year. But I'm not sure I want to be the test case on this. Could you imagine what would happen if a court decided that citizens could write off inflation losses as they could with any other investment asset? Dollars are just non interest bearing notes after all.

craigr wrote: I thought it would be fun to write off the depreciation of the dollar on my taxes as a capital loss each year. But I'm not sure I want to be the test case on this. Could you imagine what would happen if a court decided that citizens could write off inflation losses as they could with any other investment asset? Dollars are just non interest bearing notes after all.

But you can only realize the loss after selling the asset.  So you would have to convert all the $$ denominated assets into something else.  And you would have to prove that you have correctly fixed their purchase value -- somehow tracking the CPI since the date you acquired each dollar.  Interesting exercise though.

Bongleur wrote:

craigr wrote: I thought it would be fun to write off the depreciation of the dollar on my taxes as a capital loss each year. But I'm not sure I want to be the test case on this. Could you imagine what would happen if a court decided that citizens could write off inflation losses as they could with any other investment asset? Dollars are just non interest bearing notes after all.

But you can only realize the loss after selling the asset.  So you would have to convert all the $$ denominated assets into something else.  And you would have to prove that you have correctly fixed their purchase value -- somehow tracking the CPI since the date you acquired each dollar.  Interesting exercise though.

As for correctly assessing depreciation, use the CPI itself. Would they argue that the CPI was not accurate for purposes of determining how much in value the dollar lost?

No I'm not going to do this, but I always thought it would be interesting to think about. Federal Reserve Notes are zero interest bearing securities after all, so I wonder if there is a specific provision prohibiting such a thing. Or if there could be a way to do it and still be completely above board and throw the inflation the govt. is causing right back into their laps using established methods for writing off losses.

The CPI is not "fixed" in real time; only IIRC quarterly, and then subject to massive revisions.  So you need to satisfy the examiner that your value is "correct."

That MIT project has a CPI analogue in fairly real time...

craigr wrote: I thought it would be fun to write off the depreciation of the dollar on my taxes as a capital loss each year. But I'm not sure I want to be the test case on this. Could you imagine what would happen if a court decided that citizens could write off inflation losses as they could with any other investment asset? Dollars are just non interest bearing notes after all.

I read recently where Harry Markopoulos (sp?), the trader who alerted the SEC about Madoff, believes ignoring the depreciation of US dollar-denominated bonds by inflation may be the next big financial scandal waiting for its consequences to be exposed.  Not the fact that the government depreciates the dollar, as governments around the world have done that for millennia, but the fact that the ratings agencies--S&P, Moodys, Fitch, etc.--don't take this into account when they rate long-term bonds.  

Even with relatively mild annual inflation rates, a 10 to 30 year bond held to maturity will not return principal that is in real terms the same as the original principal invested.  In real terms, half or more of the original investment could be lost to currency depreciation, especially over a decade or more.  According to Markopoulos, this is a material fact that is not disclosed or taken into consideration when the bond is rated.  

This principal depreciation is a separate issue from any increase in the coupon rate with inflation, and I don't think even TIPS and other CPI-based coupon rated products (like I-Bonds) fully take it into account, either.  

There are plenty of websites that can calculate real values past to present, present to past, so this is not an unknowable data field.  And there are ways of using past and and present performance (which is what ratings agencies do) to make future predictions about how the Federal Reserve and the Treasury manage the dollar.  According to his radical but wise notion, institutions and individuals who buy bonds--not just government bonds, BTW, but any bonds denominated in US dollars--should have some assurance that the real principal they paid in will be returned in full at maturity.