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Late
last
year,
I
attended
a
hearing
of
the
congressional
Joint
Committee
of
Taxation
on
the
taxation
of
financial
products.
One
of
the
four
speakers
testifying
that
day
was
attorney
David
S.
Miller,
who
put
forth
the
idea
that
really
rich
people
should
mark
their
assets
to
market
at
year-end
and
pay
tax
on
unrealized
profits
every
year.
A
professor
from
Columbia
University
testifying
at
the
hearing
also
thought
that
an
annual
tax
on
unrealized
profits
wasn't
a
bad
idea.
Tax
lawyer
Andrea
Kramer
was
the
lone
voice
of
skepticism,
having
thought
through
the
practical
problems
with
such
an
idea.
On
April
1,
the
blog
Tax Prof
reported
that
Warren
E.
Buffett
liked
Mr.
Miller's
idea
so
much
that
he
would
start
the
ball
rolling
by
paying
a
15%
tax
on
his
unrealized
appreciation
in
Berkshire
Hathaway
Inc.
The
blog
reported
that
Mr.
Buffett
had
sent
a
check
for
$1.2
billion
to
the
Internal
Revenue
Service
voluntarily.
Thankfully,
on
later
inspection,
I
found
out
that
his
largess
was
only
an
April
Fools'
Day
hoax.
But
the
drumbeat
for
mark-to-market
taxation
can
still
be
heard.
In
looking
for
literature
on
the
subject,
I
found
that
every
20
or
30
years,
Congress
toys
with
the
idea
of
changing
the
realization-based
capital
gains
taxation
model.
A
few
of
these
forays
ended
after
pretty
much
everyone
came
to
the
conclusion
that
asking
people
to
pay
tax
on
phantom
profits
just
isn't
fair.
Others
got
past
the
fairness
issue
but
got
bogged
down
on
the
problems
that
taxpayers
would
face
trying
to
find
the
money
to
pay
the
tax
on
the
unrealized
appreciation.
I
was
aghast
when
I
read
one
paper
blithely
suggesting
that
investors
just
take
out
margin
loans
to
pay
the
tax
as
long
as
the
tax
rate
isn't
above
Regulation
T's
50%
borrowing
limit.
If
the
analysis
gets
past
these
hurdles,
the
practical
realities
of
administering
the
tax
come
into
play.
Are
capital
losses
marked
to
market,
too?
Can
taxpayers
start
deducting
capital
losses?
If
not,
can
the
losses
at
least
be
carried
back?
How
much
money
does
the
Treasury
lose
by
allowing
the
deductibility
of
losses?
The
really
big
headache:
How
does
one
value
a
fine-art
collection
or
real
estate?
Mr.
Miller's
answer
is
to
apply
this
concept
only
to
those
publicly
traded
securities
that
have
easily
ascertained
year-end
values.
Previous
analyses
have
discussed
creating
asset
classes
of
winners
and
losers,
and
concluded
that
doing
so
would
cause
massive
economic
distortions.
To
minimize
taxes,
people
would
move
out
of
publicly
traded
securities,
hurting
the
markets.
A
behavioral
change
leading
investors
to
favor
insurance-wrapped
products,
over-the-counter
derivatives
and
private
securities
would
be
inevitable.
The
reason
that
Congress
contemplates
the
marking
to
market
of
assets
every
so
often
is
the
perception
that
investors
have
too
good
a
deal
under
the
realization
system.
The
ability
to
cherry-pick
what
gains
or
losses
to
realize
and
pay
tax
on
is
indeed
an
important
tool
in
tax-efficient
investing,
but
that
isn't
all
that
Congress
fears.
Under
our
system,
the
IRS
is
your
partner
when
you
make
money,
but
when
you
lose,
you're
on
your
own
—
unless
you
have
been
lucky
enough
to
have
taken
some
gains
that
year.
The
limitation
on
the
deductibility
of
capital
losses
is
the
trade-off
for
being
able
to
time
the
realization
of
gains.
The
wash
sale
rule
hinders
a
true
ability
to
manipulate
gains
and
losses.
The
straddle
rules
inhibit
any
possible
problems
with
cherry-picking
gains
and
losses.
The
root
of
the
problem
is
the
favorable
rate
given
to
long-term
capital
gains.
The
tax
code
encourages
investors
to
alter
their
behavior
and
tilt
toward
long-term
capital
gains.
Once
the
government
asks
taxpayers
to
alter
their
behavior
in
a
particular
way,
they
will
oblige.
In
the
case
that
publicly
traded
securities
were
singled
out
for
harsh
tax
treatment,
there
would
be
an
evolution
of
new
financial
products.
These
investments
wouldn't
fit
within
the
definition
of
marked-to- market
securities,
yet
would
mimic
direct
holdings
as
best
they
could.
Most
studies
and
testimony
on
the
subject
of
timing
capital
gains
taxes
conclude
that
realization-based
taxation
is
the
right
way
to
go.
In
addition,
even
if
it
were
preferred
philosophically,
the
mark-to-market
method
couldn't
be
levied
on
all
assets
and
thus
wouldn't
work.
Like
democracy,
a
realization-based
taxation
system
may
not
be
perfect,
but
it
is
still
the
best
method
that
exists.
This article and other articles are provided for information purposes
only. They are not intended to be an offer to engage in any securities
transactions or to provide specific financial, legal or tax advice.
Articles may have been rendered partly inaccurate by events that have
occurred since publication. Investors should consult their
advisers before acting on any topics discussed herein.
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