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Fair Capital Gains Computation

The Government is too stupid to implement this, of course
 
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There has for years been lots of arguing over "Capital Gains" in the US tax code. Example: If I bought a painting for $1000 five years ago, and sold it this year for $10000, then the investment of my capital has resulted in a gain of $9000. The arguments stem from the effects of inflation on the calculation. Example: During the hyperinflation era of Germany after World War 1, that $10000 sales price would actually represent LOST value of having invested $1000 over five years in a painting. Currently the US tax system ignores inflation altogether, and wants taxes paid on that "capital gain" of $9000, regardless.

Solution: Every year the Government already computes Cost of Living, and Inflation Rate. Whether plus or minus, and no matter what the magnitude, those annual Inflation Rates should be applied to every initial investment of capital, such as $1000 for a painting. When the painting is sold (using 5-year example), one would be able to compute the effect of inflation on the investment, from the Public Record of inflation rates. Example: Assume inflation rates of 1%, 2%, -1%, 5%, and 2% for the five years, so simply add each rate to 100% and multiply: $1000 x 1.01 x 1.02 x .99 x 1.05 x 1.02 = $1092.31 (rounded). (NOTE: if inflation rate is Zero, then 1000 x 1.00 = 1000.) The Capital Gain then becomes the difference between the actual sales price and the inflated value of the original capital: $10000 - $1092.31 = $8907.69. That last figure is therefore the amount of taxable Capital Gains Income, for the sale of the example painting.

For a partial-year Capital Gains computation, a pro-rated inflation-rate calculation (or perhaps a monthy inflation-rate calculation) would be appropriate. I'm sure you don't want to be bored with the details of that here. :)

Vernon, Jul 25 2003

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       I hate math and I'm not very good at it. But, to the best of my knowledge of the Capital Gains Tax laws (which is also quite limited) this only applies to something that you have owned less than 2 or 3 years so the 5 year example would be moot.   

       But, lets consider for a moment that you had to pay a tax on this property that you sold after 5 years...the difference between 9,000 and 8,907.69 is only $92.31. If your inflation rates were any lower, than the actual difference would be lower as well. We're talking under $100.00. If I had all that math to do, then I would probably screw it up and have to pay an accountant to do the work for me. He would charge me more than $100.00 to do the work...so I've actually lost money on the Capital Gains Tax modification that you are talking about.   

       I love your idea Vernon, but how about we just get paid cash, lie about what we sold it for and be done with all that (icky) math?
vendetta, Jul 25 2003
  

       vendetta, inflation isn't always as low as in the example, and people sometimes hold on to things for a decade or more. I worked in the tax industry for a time, and know that Capital Gains come in two basic categories: Less than one year, and more than one year, between time of purchase and time of sale. It always refers to deliberately-invested money, outside of ordinary wholesale or retail business dealings. The five-year example I gave is quite appropriate to the discussion. Someone who buys a painting for $1000 and sells it for $10000 after 25 years might indeed actually lose value on the deal, thanks to inflation. Much as you dislike math, it is the only tool we have for figuring out things like this. Especially for figuring it out fairly (so I cannot condone the cheating you suggested). Also, keep in mind that investors who do capital gains stuff usually do LOTS of it; for them there could be many thousands of dollars riding on the difference, and not a mere $92.31.
Vernon, Jul 25 2003
  

       Good points. After reading your response I realize just how little I really know about math and investments in general. Also, that I would make a terrible mobster.   

       In light of the facts that 1)you know more about this than me and 2) the government is indeed too stupid to implement it (not to mention the fit that the environmentalists would throw if word got out they were using all that extra paper) I will award a pastry. Also...how much do you charge to do math for the huddled masses?
vendetta, Aug 01 2003
  

       vendetta, sorry, I was working as a computer programmer in the tax industry, and not as a tax preparer, who usually is a (C)ertified (P)ublic (A)ccountant (which I'm not -- there were other people who worked with me who did the CPA stuff, validating our software). While I could do tax returns (I do my own, simply to save $$), I prefer doing other things more.   

       Your mobster remark reminds me of two things: Al Capone was finally carried off to jail for tax evasion, and Lucky Luciano, when subpoenaed by some Congressional Committee and asked why he shouldn't be deported, answered, "I pay my tax." (That incident was caught on film (B&W), and everyone busted out laughing.)
Vernon, Aug 27 2003
  
      
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