I'm sitting on billions of capital gains and invest 20mil a pop in a diversified portfolio of startups like uber, theranos, juicero, etc. 4 years later my shares of uber are worth a billion dollars and the rest of my portfolio goes to 0, so as a recently divorced old balding man I sell enough shares to match my losses and buy a $175mil mansion and a yacht for my yacht. My net long term capital gains for the year is 0 so I pay no taxes.
The point is, you start from a $100 initial investment that has already turned into 100s of billions of dollars of unrealized gains which you can now selectively live off of without paying a dime in taxes by harvesting losses.
>I sell enough shares to match my losses and buy a $175mil mansion
If you had $175M to buy a mansion and paid $0 tax, you must have had $175M of losses as well. To have $175M of losses, you had to have paid $175M for those Theranos and Juicero shares. So you already had $175M sitting around in your bank account a few years ago. You could have just left it there and bought your mansion now. Your scheme gained you nothing, in fact you are worse off because you had to sell $175M of your Uber shares, which you wouldn't have had to sell if you had just kept your $175M in your bank account rather than investing in Juicero and Theranos.
My point is that the $175M you had in your bank account years ago was already realized and fully taxed because it was cash. So being able to spend it on a mansion is fair because it's already fully taxed. You used it up on your mansion and cannot spend it on anything else. If you want to buy a second mansion you'll have to find some new fully taxed money (such as sell more Uber shares and actually pay capital gains tax on them).
You need to account for the purchase of Uber shares here:
> you had to sell $175M of your Uber shares
If you had these separately to the Theranos etc shares, you had to buy them. Since the $175M was a full loss of $175M then that can't account for the (non-losing) Uber shares.
> you had to sell $175M of your Uber shares, which you wouldn't have had to sell if you had just kept your $175M in your bank account
You'd need to know to only invest in Uber, and not in Theranos etc to do this. The idea of the portfolio is you need to invest broadly to allow for the successes. If you kept the $175M in your bank account, you wouldn't be able to achieve that.
Yeah, I agree with all that. But I want to clarify a little.
>If you had these separately to the Theranos etc shares, you had to buy them. Since the $175M was a full loss of $175M then that can't account for the (non-losing) Uber shares.
Yep. So you had to have more than $175M of fully taxed money at the beginning. But most of that stayed in Uber, only a small percent of the Uber stock needed to be sold. This makes my original argument stronger, but only slightly. Since it only made my argument slightly stronger I didn't bother mentioning it.
>You'd need to know to only invest in Uber, and not in Theranos etc to do this. The idea of the portfolio is you need to invest broadly to allow for the successes. If you kept the $175M in your bank account, you wouldn't be able to achieve that.
Sure. But my main point is that this isn't a method to spend money while delaying tax on it. m_ke seemed to be saying a billionaire can spend money on a mansion without paying tax on it right away, but that $175M at the beginning already had tax paid on it. So the $175M spent on the mansion was fully taxed already.
A diversified portfolio helps with optimizing stock sales to delay some taxes. But enough taxes are still paid early such that every dollar spent is fully taxed by the time it's spent.
A simpler example: Today you buy $100 of Theranos and $100 of Uber. Tomorrow your Theranos is worth $0 and Uber is worth $200. You put in $200, you still have $200, you use the Theranos loss to offset the Uber win. This is good, this is how things should work.
But some here would say "OMG he evaded taxes on the $100 Uber gain!"
Tax loss harvesting is not a loophole, it's exactly the right thing to have, and it's available to everyone.
True, you avoided paying taxes, but you have less money than you would if you didn’t make the failed investment (you lost more money on that investment than you saved in taxes). Therefore the statement “no downside risk” is incorrect. Your downside risk is discounted by your tax rate, it’s not zero.
No, you make a ton of risky investments to build a diversified portfolio banking on only a few of them being unicorns. This allows you to cash out previous gains to match all of the losses that you pick up each year on the failed investments, while the successful ones keep appreciating and adding to your unrealized gains.
Which changes depending on losses. What you are missing is you needed to purchase the portfolio in the first place - The more tax you can write off, the more it mean you lost in the first place.
assume tax rate 25%, portfolio of startup portfolio cost $X.
$UBER_CG_BILLIONS - $X is portfolio unrealised CG. I'll assume this is positive, meaning $X < $UBER_CG_BILLIONS.
Assuming "I sell enough shares" means uber shares (as opposed to some other share),
I sell exactly $X worth of my Uber shares (ignoring what I paid for the Uber shares themselves), which I offset against losses to pay no tax. Since I had to pay $X initially, this is my original investment restored.
I retain ($UBER_CG_BILLIONS - $X) worth of Uber shares.
Where does the $175mil come from? Assuming it isn't the $X I had to invest in the first place, I could sell more Uber shares, but I would have to pay full tax - I already offset all my losses in order to get the original investment back.
TLDR; you suggest $175mil was gained without tax, but without mentioning how much was lost on the portfolio in the first place - presumably more than $175mil.
EDIT: Now assume that $X is $100 for the whole portfolio, per last sentence. How common would an Uber-billions unicorn be for such a small investment to rocket like that. The more diversified your portfolio, the thinner you spread your investment. Uber stock would have to increase by 10,000,000 in value to be worth just 1 billion, even if you only invested you $100 in Uber. It would need to increase by a factor of 1,000,000,000 to be worth "100s of billions".
The point is, you start from a $100 initial investment that has already turned into 100s of billions of dollars of unrealized gains which you can now selectively live off of without paying a dime in taxes by harvesting losses.