In other words the person who earns money has no choice in when he is taxed but the investor is so we must give him a tax break because he has a choice?
We don’t tax investment, we tax the income from investment the same as we would tax income from labor.
Hong Kong has an income tax. Its low but a lot of that is because there are almost zero social services, no military and the government officials supplement their income with bribes. Its so bad, you have a separate government agency specifically devoted to bribery.
Hong’ Kong’s model can’t work for any large mature economy never mind the largest economy in the world.
Probably not, but getting paid $5 on a $10 bet is a “tax rate” of 50%, not 15%. So instead of getting paid $5 for a $10 bet, it would be more accurate to get paid $8.50 for a $10 bet. Furthermore, given that you are able to deduct losses, a more appropriate analogy would be a 15% tax when you cash out, not on every bet.
And yes, these games exist, and they’re very popular. In Pai Gow Poker and the Banker bet in Bacarat all wins are assessed 5% Commission, yet these games remain very popular. Even with the 5% Commission, the Banker bet in Bacarat is one of the best bets in the casino. 
Domestic hedge funds are pass-thru vehicles. The hedge fund is not taxed on the investment gains and losses. These pass through to the individual investor. However, for the past ~10+ years, hedge funds have been seeing huge investments from ERISA accounts, which themselves are tax-free. Hedge funds that cater to individual investors will tend to take into account the tax implications of investing. Hedge funds almost always simultaneously run an offshore fund, based in the Caymans or some other offshore domicile, to take advantage of tax breaks associated with operating in a foreign jurisdiction for foreign investors. Individuals capable of laying down $$$ for these big name, high-churn hedge funds often have enough accountants and lawyers to allow them to operate as offshore investors.
These are (a type of) arbitrage strategies, a specific style of investing. Last I checked, it was still a minority strategy. Generally speaking, people concerned with the difference in LT/ST gains do not take part in arbitrage strategies.
foosguinea, you are allowed to deduct capital losses from capital gains. The wash sale rules mentioned above are to prevent asset managers from trying to game the system with regards to taxes (and they are a pain in the ass) by incurring losses on December 31 then re-opening the position on January 2.
Damuri, don’t conflate interest (always treated as ordinary income) with capital gains. The terms are not interchangeable. Also, you can’t view that investment in DIS as a straight line gain. Dangerosa might have been sitting on a 180% unrealized capital gain in period 19 only to see it dwindle to 20% in period 20 (Mickey was found to be having inappropriate relations with Huey, Louie, and Dewey and the stock crashed overnight). She’s not necessarily “sitting” on a bad investment.
And yes, the investor is given a tax break because he has a choice in holding period. Reasons, regardless of whether you agree or disagree, have been given above, so I’ll not rehash them.
This is the same logic that keeps unemployment at 20% in Spain.
Well, she has a choice only in WHEN she gets taxed. She gets taxed when she realizes gains. If she never realizes the gains, she never gets taxed - but she never has access to her money either.
I had an emergency this year that caused me to liquidate and then rebuy a lot of stock over a fairly short term (not wash short term, longer than that). So I’ll pay taxes this year to be able to USE my money.
BTW, workers can do the same thing if their employer sets up deferred compensation accounts - you earn the money in 2010 - but since your employer isn’t going to pay you until 2025, you won’t pay taxes on it until then. Of course, you won’t have your money until then either. (Its a little more complex than that, there are two kinds of deferred comp accounts - if your employer moves the money to you, you get taxed - if they hang onto it for you - you don’t get taxed until it moves to you. Of course, choosing not to take the money is risky, just like it is in the market. If you choose not to take the money now so you don’t pay taxes now, and the company goes Enron, you might not see ‘your’ money).
Ok, but there is no capital gains tax. I don’t think anyplace is solely a consumption only tax, but I’ll stick with Dubai and no-tax-at-all… unless you are American, North Korean or Libyan (or Canadian if you still have large ties to Canada) and still have to pay tax to your home country.
In order to get the most revenue from the capital gains tax, yes.
Well, you don’t HAVE to give an investor a tax break, but the realities of the situation dictate that there is a logical reason why they might be treated differently.
Actually the point is to make sure capital is liquid enough so that it can be invested into the best projects. Cashing out does not necessarily mean selling an asset for the cash, you are also taxed if you sell a stock in order to invest in a different one. And in fact if folks are less likely to be locked in with their investments there is greater chance they may decide to invest than to spend the money.
I am not advocating a zero percent capital gains tax or that it be taxed at the marginal rate of income. I am simpy trying to point out that there is a differnce between the two types and that is a explanation for why there is a different tax rate. Whether it is fair or unfair is a different question, but it is certainly not illogical.
Okay so you go for a few years of capital gains taxes on your investments. Can you get it back when your investments tank, and you are making no income at all?
I’m thinking what’s fair is fair.
You can write off stock losses against ordinary income to the tune of (IIRC) $3000 in a year - but you can carry over those losses. You don’t pay any tax on the gains until they are realized though. Is that what you are asking?
You can write off stock losses against stock gain until you run out of gain.
(BTW, you can write off gambling losses against gambling gain as well - so if you hit it big on the poker tables in Vegas, know how much you lost before that point - keep good records if you are going to gamble to the point where you would worry about writing off losses if you win).
So, you may have paid 100,000 in capital gains taxes, but if you go broke and no longer make any income, your past capital gains taxes are irretrievable aren’t they?
Dangerosa has answered, but if you are asking whether you can get back CGT that you have already paid, the answer is no. You can offset losses against gains in the current year or future years (or against income up to $3,000 per year), but you cannot get back taxes already paid.
On preview, I see that you are indeed asking this question.
Yep, just like if you earn $100,000 in ordinary income and then go broke.
Well that is fair, because you used up the money you earned. You benefited from what you earned.
You never benefited from your capital gains of the past if they disappear.
Huh? How do capital gains disappear? What do you mean by that?
Well if your stock value climbs to $200,000 from $100,000 over say 5 years, your capital gain is $100,000 and at 15% you’ve forked over $15,000.
Your stock tanks and you are left with nothing. No net capital gain at all, in fact a net capital loss of $100,000.
You only pay the capital gains if you sell the stock.
To expand, you only incur (called realize) a capital event (gain or loss) when you close a position. You do not pay, nor can you write of losses, on capital events that are unrealized.
So if you make one purchase of stock, hold it for 20 years, and then sell it, you only have one taxable event on the sale. How high or how low the price went in between is meaningless.