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Share identification under bipartisan attack?

Happened to see this on Kaye Thomas's Fairmark site today and wanted to pass it along:
"...both President Obama and Dave Camp, the Republican Chair of the House Ways and Means Committee have proposed to repeal share identification, the rule that permits investors to choose which shares they?re selling when disposing of part of their holdings. They would replace it with a rule that is far more complicated and produces arbitrary, inaccurate results."
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Rich Carreiro                            rlc-news@rlcarr.com
Reply to
Rich Carreiro
This started a year ago but I don't think it has gotten much traction really. The alternative W&M proposed, average cost, is actually more complicated to keep track of.
Let's face it, specific ID isn't something that can be defended rationally...it's one of thousands of arbitrary rules about computing what taxable income is. Average cost does make logical sense, but it's a record-keeping nightmare and could probably be gamed by opening multiple accounts. Unless they wrote a long complex rule to trap the gaming, expanding the tax code by that much more for little benefit.
I hope that the concept of inflation-adjusted cost basis is being kicked around in committee. It would better define "income" from the sale of assets. If you pay $100 for something and sell it many years later for $100 (with both of those being in "current dollars") you haven't really earned anything. Ditto if you inherit something that cost $100 (inflation-adjusted) and is now worth $100. So with inflation-adjusted basis, it would be palatable to repeal the long-term capital gains rate, and the step-up of basis at death.
-Tad
Reply to
Tad Borek
If inflation and interest rates are both 3%, in real terms I have zero income, but I am taxed on nominal income. If capital gains taxes are adjusted for inflation, I don't see why interest and dividends should not be also. Extending this logic, the deductions for interest on mortgages and (for corporations) interest on debt should be reduced. I'd rather have such a low rate of inflation that the complexity of inflation indexing is not worth the cost.
Reply to
Beliavsky
That's a good point, but a distinction is that interest and dividend income is paid out continuously, available for spending immediately, and taxed year-to-year in current dollars. There's a stronger argument that it's truly "income" in the sense of "newly-created cash for me, to buy stuff."
Plus, inflation should be priced in already - with the market only paying for real returns, on average, over time (net of tax, too). If inflation is high, interest rates should be high too - and dividends should increase. Current zero-or-or less real rates are an historical anomaly. Or put another way, the discount rates that set the acceptable level of yield have to me always reflected an inflation component.
-Tad
Reply to
Tad Borek
Here's a bit more (from Kaye, in a comment thread):
They're different. The Camp proposal, which should be available on the website of the Ways and Means Committee, would require use of the averaging rule that is currently available for mutual fund shares. The version in the Obama budget proposal is far worse. It would require averaging only for long-term shares, and it would also require averaging across accounts. If you want to read about that one, you can go to the website of the Joint Committee on Taxation and pull up their recent analysis of the tax provisions in the budget proposal.
The ABA Tax Section has come out with commentary on the Camp proposal in which the relevant committee couldn't agree on whether identification should continue to be permitted but arguing against the averaging requirement. I'm astounded that anyone who thinks seriously about the issue could believe it makes sense to do away with identification, which is necessary for neutrality of investment choice and fairness of tax results. The idea that identification provides the taxpayer with an improper advantage is the product of superficial thinking.
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Rich Carreiro                            rlc-news@rlcarr.com
Reply to
Rich Carreiro
Abolishing specific ID would encourage people who want its benefits to invest in a multitude of funds tracking almost the same objective. You could put some money in an S&P ETF, another tranche in a mutual fund tracking the SPX, another in a fund tracking the Russell 1000 etc. When you needed to sell you'd sell the fund with the smallest percentage gain since purchase. Abolishing specific ID might not raise more revenue from large, sophisticated investors.
Reply to
Beliavsky

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