This is one area I’m ignorant on that I wish I knew more. How are these daytraders or fund managers avoiding capital gains taxes? When they are liquidating a position as they are selling securities, they are trying to preserve prior gains. At best aren’t they getting hit with 15% capital gains taxes on the sale? If so, the fund manager has to believe they will lose more than 15% to justify the transaction right? Again this is best case assuming they’ve held the security for more than a year. Short term capital gains taxes can be as high as 37%!
I understand folks making these vast swinging trades in their IRA or 401k where they are immune to capital gains, but how are fund managers (or regular retail after tax investors) making these wild swings without being eaten alive by taxes?
You are taxed on the gains, not on the total sale volume.
So if I buy something today for $5, and sell it tomorrow for $6, I pay the 37% on the $1 of gain.
So my takeaway is $5.63, not the $3.78 it would be I was taxed on the full sale.
It’s also worth noting that capital losses can offset gains. So if I made $1000 on one trade, but lost $1000 on another, my effective tax is $0, because I didn’t make any money.
This can get squishy though, as there are a lot of accounting loopholes you can do to count things as “losses” that are more losses on paper than actual losses.
You are taxed on the gains, not on the total sale volume.
You’re right, of course, I didn’t write that well. I’m in for the long term and don’t usually think about the smaller gains usually in short term. For me, even just the long term gains are substantial with the 45%-ish increases in value in the last couple of years prior to trump.
It’s also worth noting that capital losses can offset gains. So if I made $1000 on one trade, but lost $1000 on another, my effective tax is $0, because I didn’t make any money.
I knew this part too, but if a hedge fund/daytrader is doing this enough that their capital losses offset their gains, then they would be a pretty worthless hedge fund manager/daytrader, right?
This can get squishy though, as there are a lot of accounting loopholes you can do to count things as “losses” that are more losses on paper than actual losses.
If you’re concerned about that, you might look into index funds. Many are managed to minimize capital gains at a scale that you could never do in personal trading
I’m mostly in total market/S&P500 funds, but even the capital gains from the last 2 years are significant. Again, this was a question more of a position of hedge funds managers and day traders that do lots of short term trading, not long term retail investors like me.
This is one area I’m ignorant on that I wish I knew more. How are these daytraders or fund managers avoiding capital gains taxes? When they are liquidating a position as they are selling securities, they are trying to preserve prior gains. At best aren’t they getting hit with 15% capital gains taxes on the sale? If so, the fund manager has to believe they will lose more than 15% to justify the transaction right? Again this is best case assuming they’ve held the security for more than a year. Short term capital gains taxes can be as high as 37%!
I understand folks making these vast swinging trades in their IRA or 401k where they are immune to capital gains, but how are fund managers (or regular retail after tax investors) making these wild swings without being eaten alive by taxes?
You are taxed on the gains, not on the total sale volume.
So if I buy something today for $5, and sell it tomorrow for $6, I pay the 37% on the $1 of gain.
So my takeaway is $5.63, not the $3.78 it would be I was taxed on the full sale.
It’s also worth noting that capital losses can offset gains. So if I made $1000 on one trade, but lost $1000 on another, my effective tax is $0, because I didn’t make any money.
This can get squishy though, as there are a lot of accounting loopholes you can do to count things as “losses” that are more losses on paper than actual losses.
You’re right, of course, I didn’t write that well. I’m in for the long term and don’t usually think about the smaller gains usually in short term. For me, even just the long term gains are substantial with the 45%-ish increases in value in the last couple of years prior to trump.
I knew this part too, but if a hedge fund/daytrader is doing this enough that their capital losses offset their gains, then they would be a pretty worthless hedge fund manager/daytrader, right?
This is the part I’m ignorant about, I think.
If you’re concerned about that, you might look into index funds. Many are managed to minimize capital gains at a scale that you could never do in personal trading
I’m mostly in total market/S&P500 funds, but even the capital gains from the last 2 years are significant. Again, this was a question more of a position of hedge funds managers and day traders that do lots of short term trading, not long term retail investors like me.