White Papers

Capital Gains - The Tax Trade-Off Explained - Rockefeller Financial

Tom Burroughes Group Editor London 3 June 2010

Capital Gains - The Tax Trade-Off Explained - Rockefeller Financial

A new white paper by Rockefeller Financial explains the trade offs that investors face in choosing to realize capital gains now and pay lower taxes, or try for more gains and pay a higher rate later on.

As the UK government contemplates the controversial step of raising capital gains taxes to help plug a massive public deficit, the issue of how CGT operates and affects investment returns has never been more timely, not just for the UK but in other parts of the world, such as the US.

Step forward Matthew Gelfand, an economist and senior wealth advisor at New York-headquartered wealth management titan Rockefeller Financial. He has written a white paper report, Pay Now Or Pay Later? Capital Gains Harvesting With Changing Tax Rates. The report examines the choice confronting investors on whether they should realize capital gains on investments now while tax rates are low or hold investments into the future, although they will likely pay a higher rate of CGT if the investments are profitable.

Central to the report’s focus is an examination of the precise trade-off that exists between paying capital gains now with rates at 15 per cent versus keeping those gains unrealized until a future date.

Gelfand argues that while the benefits of paying lower taxes are clear, there are also opportunity costs to consider: every dollar an investor pays in taxes today on realized capital gains could instead remain invested, potentially earning further gains (and interest on dividends) until some future date of sale, at which point the investor would pay greater taxes on both the initial dollar and resulting gains.

If future gains were large enough, they could more than compensate for the higher taxes. If the future gains were relatively small, however, they could fail to cover the added taxes.

The white paper argues that the nature and purpose of the investment, as well as investment performance, are key considerations and the report concludes that only in some cases would it be profitable to sell an investment prematurely.

To obtain a copy, readers can email inquiries@rockco.com

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