Archive for the ‘Finance’ Category

Disclaimer – If you haven’t read my disclaimer yet, make sure you do so here. TL;DR version – Buyer beware, I am not an expert, I am fumbling my way through this like the rest of you.

Also, I hold a little bit of Bitcoin and Ethereum.

The promise certainly sounds good

Blockchain promises us something absolutely amazing – the decentralization of everything:

  • Whereas all currencies today are run by central governments, Bitcoin is not controlled by anybody because it is decentralized and therefore nobody can manipulate it
  • Whereas platforms are built on private corporations’ servers, Ethereum is not controlled by anybody because it is a decentralized platform that nobody can manipulate
  • Whereas all of our data is controlled by a handful of big companies, files stored on the blockchain are distributed everywhere so nobody can control it

This promise of decentralization is key to the entire value proposition of blockchain.

But tech has touted the benefits of decentralization before, and it didn’t live up to the hype.

The idea behind networks and the network effect is that you have a bunch of nodes that are more-or-less evenly connected, so that everyone can learn from everyone else. This is the grand bargain behind social networks – by sharing information, the best and most correct ideas will bubble to the top while the wrong and worst ideas will fade away. Information wants to be free – and shared – and therefore reason and logic will win the day because of the free flow of information. Good ideas survive (eventually), bad ideas are disproven (eventually) .

That’s what we were promised.

The reality looks way different

But it’s not how it turned out. Social networking, far from having a unifying affect on people, has turned out to have the opposite effect. It’s made us more divided than ever. And, far from weeding out the bad ideas, it turns out that wrong ideas flourish in social networks.

The reason is (partly) because in a social network, nodes are not evenly distributed where information flows freely amongst everyone. Instead, it turns out that there are bottlenecks everywhere. Groups are localized among each other, and connected via super-connectors (pictured in blue in the diagram below). We stay by ourselves in our groups and only occasionally interact with the outside world, and it’s done via the super-connectors.

This ends up suppressing the free flow of information, and reinforcing our own particular points of view, since information depends upon whether or not they can get through the chokepoints.

The tech industry seems baffled about why this occurred. Wasn’t information supposed to be free? Didn’t it want to be free? Wasn’t free expression and debate supposed to sift out the bad ideas? How could this be? [1]

Yet this was entirely foreseeable. The decentralization of information has occurred before, the Internet is not the first time. The most obvious example is the Protestant Reformation. Whereas Christian theology used to be centralized in the Catholic church, the Protestant Reformation’s rallying cry was that all people could be their own priests, and everyone could interpret holy scripture for themselves. The interpretation of divine revelation was meant to be free, not centralized.

While the Reformation succeeded in reforming the Church, it also caused a lot of divisiveness, wars of religion, and tens of thousands of splinter denominations. That’s what happens when you decentralize, anyone can come up with a particular view; and then if you have enough skillz to make a particular outlook popular, you can get people to join along with you and embiggen your group. I suspect Martin Luther did not foresee that people, upon interpreting scripture for themselves, would come up with such different interpretations and would form splinter groups as much as they did.

In the same way, tech did not foresee how the decentralization of information on the Internet would lead to the insulation of people seeking to reinforce their own particular viewpoints and biases, rather than seeking diversity of opinion in a quest for truth. Yes, that exists. I do it, you do it, we all do it. But we also prefer to reinforce our own viewpoints in many areas of our lives.

As a representative of the tech industry who was caught off guard by this, I plead guilty. I don’t know whether or not I should have known better back then… but I certainly do now. The results of decentralization can be mixed [2].

What happens when we apply it to new technology?

Which brings me back to Blockchain. As I said earlier, its biggest premise is decentralization. Yet decentralization is a mixed bag. Will it deliver on its promises? Or will it fall flat? Or worse, will the results be mixed such that we become so dependent on the good that we can’t roll back the bad, lest we simultaneously rollback the good?

Bitcoin has been a roller coaster since its inception. It’s up bigly since it was created but has undergone massive corrections of 30-60% every few months (it recently corrected 45% from its peak this past December 2017, and only took a week to do it). Is this massive volatility a temporary thing until Bitcoin stabilizes as it gets more adoption? Or, is volatility a feature of Bitcoin because of its decentralized nature, where anyone can come in and buy/sell with no financial oversight?


All this volatility is not a good thing; between buyers and sellers, if the medium of exchange is likely to fluctuate wildly, then what you pay is likely to be far different than what you agreed upon. That makes it less likely you will want to use it as a medium of exchange which was one of Bitcoin’s original benefits – to act as a decentralized currency (although as I have said before, it behaves more as a store-of-value since the IRS treats the dispersion of your Bitcoins as a taxable event).

Thus, when it comes to using blockchain as a currency, decentralization has the benefits of being a deflationary currency that is resistant to manipulation by central banks, but it’s still potentially vulnerable to manipulation by the millions of end users who have their own ideas of what digital currency is, and what it should be, and then shunt it off from its original purpose.

I don’t know whether or not that’s a good thing.

What about decentralized applications? Those act as a currency (sort of) and as a platform to build stuff on. I don’t know about those, maybe they are useful and maybe they aren’t. For sure, blockchain promises to be disruptive. There are some like Ripple and IOTA that solve real problems; Ripple is criticized for being a private implementation of a blockchain, which conceptually it isn’t but in practice it kind of is. But even if Ripple is pseudo-private, is that a bad thing (because it undermines the concept of blockchain as a decentralized application) or a good thing (since it means it can’t be accosted by “do it yourselfers”)?

I think that this is one of the fundamental known-unknowns with blockchain. Decentralization may be awesome.

But then again, it may be yet another false prophet.


[1] This blog post is inspired by an article I read in Foreign Affairs magazine (I am a subscriber), see The False Prophecy of Hyperconnection – How to survive in a networked age. It’s behind a paywall, though.

[2] For more on the Reformation, see Majority believe Reformation was divisive, but justified


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I’m getting a tax cut. Oh, joy!

This past week, President Trump signed into law a tax cut passed by the House and the Senate without a single Democrat vote. The tax cut lowers the corporate income tax rate from 35% to 21%, reduces the tax rates on the various income brackets, and repeals the individual mandate part of Obamacare. It also retains a slew of other tax breaks for wealthy individuals.

You might think I’m saying to myself “Oh, boy! I’m getting a tax cut! More money in my paycheck!”

But I’m not. I think that this tax cut is a bad idea. I used to write on this blog about 10 years ago that tax cuts were a good idea since it put more money into the hands of people who were likely to reinvest it in the economy and grow it, resulting in more jobs and prosperity for everyone. I have since reversed my position on that, tax cuts don’t make sense except at certain times. Now is not one of those times.

Why do I say this?

I calculated how much I will save on income tax. It’ll be about $7000. That’s nothing to sneeze at but I am an outlier. The Republicans have tried talking up the fact that the average family will save about $2000, and what working family wouldn’t want to save an additional $2000? Yet this claim is misleading because averages are skewed towards wealthier individuals. I am not wealthy, but you can see that my $7000 skews that average upwards. If there are five families getting an average of $2000, then that means that my $7000 takes up 70% of the break, leaving $3000 for everyone else – about $750 for the other four families. So even though the average is $2000, the reality is that the “average” family gets no where close to that. And the really wealthy individuals skew that much more than I ever could.

In reality, an average American family might get a $1000, or less than $100/month.

Still, you may say “But that’s $1000 they wouldn’t normally have! They should be grateful!”

Should they?

First, the Republican tax cut is going to add $1.5 trillion to the deficit, which means that in order to pay for its financial and debt obligations, the government will have to print more money. Printing more money will lead to inflation, which means that extra $1000/year is eaten up because the buying power of a dollar is now less than it otherwise would have been. Inflation is always present, but now it will accelerate.

Second, the individual mandate repeal of Obamacare means that people no longer have to buy health insurance. That means that young people can leave the market place, leaving only less healthy people to buy insurance. That means that health insurance companies have to charge more because whereas they used to be able to spread out the health risk among youth and healthy, sick and old, now they have sick and old and far fewer young and healthy.

This means that health insurance companies will have to charge more, which means that people will have to spend more buying their own health insurance, or employers will have to pay more to provide health insurance for their employees, or employer health plans will not cover as much. In all cases, consumer or employer buying power is reduced because money they normally wouldn’t have had to spend on health insurance now goes towards purchasing the exact same product.

Third, there will be cuts to government programs. This means that the private market has to make up the gap, which means that services that used to cost a certain amount will now cost a little bit more; or, service times will take longer meaning that people will have to wait for those services longer, and the longer we wait the less productive we are. Government spending on large projects – such as public transportation – scale much better than when private enterprise does it because of the economies of large scale. Only government has the ability to invest over a multi-year or decade timeframe, which ends up providing benefits for all of its citizens.

Fourth, eventually the bill will come due. Guess whose generation gets to pay for it down the road?

Yeah, that’s why I’m not that excited for this new tax cut. And I’m not alone, a large majority of American disapprove of it also.

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Last September (2016), the wife and I paid off the last remaining piece of the mortgage of the condo I bought in 2008. Ever since then, I’ve been debt-free.

I hadn’t been debt-free since 1996 when I first got a student loan. After that, I got a car loan in 2007, and a mortgage in 2008. I paid off the student loans in… I forget. I paid off the car loan in 2010. And then, as I said, we paid off the mortgage in 2016.

And I love being debt-free! As it says in Proverbs 22:7, the borrower is servant to the lender. I don’t want to be anyone’s servant (when it comes to money), I’d rather be the debt-owner (via holding bonds), or the owner itself (via holding stock, or property, or loans).

I don’t want to be in debt so badly that an opportunity came up to be in debt and I refused to partake in it despite the fact it would have resulted in a big savings. I need to get a new iPhone, the one I have – despite being a year old – is only 16 GB. That was a major mistake, I should have gotten the model with the most disk space because I’m always running low. It keeps filling up due to podcasts.

Best Buy was running a deal wherein you could get a new iPhone and save $150 or $200 or something on it if you signed up for a plan where you pay it off via installments. I couldn’t figure out how to pay it off all at once, and documentation on the web suggested that you couldn’t do that. That would in effect be like being in debt, it would add the payments onto the cell phone bill.

I wouldn’t do it. Either I pay for it all at once, or I don’t pay for it at all. I do not want to have to finance any purchase. Been there, done that; now finished.

Potential debt: don’t let the door hit you on the way out.

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This week on the way home from work, I caught part of an interview with the Chairman of the House Ways and Means committee, Kevin Brady. He was talking about tax reform, and how the Republicans were planning a large tax cut. I heard something on the radio that I thought sounded ridiculous, so I went back and read the transcript.

Chairman Brady was proposing a tax cut and referred to it as paying for itself, that is, the lower revenues caused by reduced rates would be made up increased wages of 8%, and increased economic growth of 9%. If you increase the size of the economy, then a smaller rate on a larger share results in the same amount of tax revenue and that’s supposed to keep the deficit from getting out of control.

I thought that a GDP growth rate was completely ridiculous! The only countries in the world that have that high rates are developing economies – because their economies are in such a shambles, they overheat when they get an influx of new capital. Developed economies like the United States simply don’t see that type of growth anymore. If he meant 9% GDP growth per year, I threw up my hands in exasperation because he wasn’t serious.

I decided to read the Tax Foundation’s analysis of the Republican tax plan (Trump’s is similar).

Their analysis must be the one that Brady is referring to because their wage growth and GDP growth numbers are the same. They estimate the plan would lead to 0.7% after-tax income increases for the entire population (oh, gee, thanks) but would go up 5.3% for the top 1% (surprise, surprise). However, when accounting for the extra GDP growth, everyone’s income would go up by an extra 8%.

The economic impact is calculated at 9% by mostly capital investment, and some wage rate increases, and new employment.

Does this make sense?

The Tax Foundation’s estimate is based upon a super-crucial, critical factor. Everything in their analysis hinges around this one fact – that lower taxes can create economic growth by spurring investment, which increases production.

In other words, if a person pays $25,000 in taxes and gets a tax break of $3000, and now only pays $22,000, they will take that extra income and invest it or spend it in the economy. Businesses will take that extra revenue to grow their business, or take that extra investment to similarly grow their business. Our economy is built on capital allocation and consumer spending.

The assumption that people will spend money they get from a tax break is correct if it goes to the lower income people (the bottom 80%). The average person spends nearly all of their income on basic things like food, shelter, transportation, maintenance of their stuff, family, and so forth. Additional incomes goes to projects they were previously putting off.

For wealthier people, they don’t spend all the money from tax breaks. Instead, they spend some of it, or they invest it. Businesses that receive money expand – they can increase productivity or hire more workers.

But here’s the thing, tax cuts can increase economic growth if the money ends up in the economy. Yet wealthy people don’t spend or invest 100% of their rebates; instead, they save it. They don’t invest it, nor do they spend. They just save it.

There’s nothing wrong with people saving money. I save plenty of money. But the problem is that saving money doesn’t grow the economy as much as either spending or investing.

So, the assumption that tax breaks lead to capital investment is incorrect, it is an overstatement.

Capital needs to be absorbed by someone

A tax break makes the economy get bigger by capital investment if a business can expand and make more stuff if there is someone to buy it. Supply without demand doesn’t increase the economy.

If wealthy people are saving money, and businesses are producing more stuff but the people who are most likely to buy (the bottom 80%) aren’t seeing much additional income and therefore aren’t buying enough stuff, then there isn’t that much revenue growth based upon internal demand within the country.

This means that a corporation must export in order to make larger revenue based upon the capital investment. But most US companies sell locally, it’s only the large corporations that sell internationally. But those international customers need additional income, too.

The point I am making here is that capital investment needs to result in increased supply and demand. The reason why the US economy grew so much in the 1950’s and 1960’s is because of Baby Boomers; the large bulge in population resulted in increased consumers and increased demand. Business couldn’t keep up, and that led to inflation.

The US population isn’t increasing as much as it used to, so to say that economic growth can increase without a proportional increase in consumers doesn’t make sense.

That’s why developing economies can rapidly increase GDP – as their child mortality rates plummeted over the past 40 years, their populations increased. And with investment in technology, it led to more wealth for the population by turning poor people into consumers.

Tax cuts need to result in more consumers to achieve economic growth, but they mostly go to the upper classes who don’t spend or reinvest as much as the lower classes.

And the one final assumption is the last problem

The last assumption that is problematic is that the estimates go out for 10 years.

When I read that, I said “Well, this is useless as a prediction.” I recently read Nassim Taleb’s book Antifragile and he makes the case that making predictions more than 6 months to a year out is useless because there are so many variables that can change.

Basing an economic analysis 10 years out and assuming stable conditions is a recipe for disaster. Since I started working full time, I’ve lived through two recessions (2001, and 2008). I will probably experience two or three more in my working time. Every time, these recessions reduce government income and put strains on the economy.

These economic models never account for this, they are always on the happy path.

We’ve never had a happy path.

The conclusion

Ten years ago I was writing blog posts that reduced tax revenue can lead to increased economic activity. That’s somewhat true, but behavioral psychology proves that it isn’t as effective as what some economists believe, including myself (at the time).

I don’t have good answers either, as I am not an economist. But what I do know is that capital investment needs to result in increased production, or increased efficiency, and it needs to be combined with increased consumption.

That’s oversimplified, but I think it’s more accurate, too.

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Recently, the White House unveiled its tax plan which President Trump said would be the largest tax cut in history. Here’s a quick screenshot of the changes:


I’ve been quasi-doing my own taxes for two years, and each time I’ve almost hit exactly the refund that H&R Block comes up with. So, I did the math on my own taxes for 2016 to see how much more money I would end up with.

The White House’s current tax plan does not list the income brackets that the three rates (10%, 25%, and 35%) are applied at. Instead, I went with a previous document he released last year or the year before and assumed the 10% rate is up to 75,000%, and the 25% rate is all of my household income for the rest; the 35% rate is higher than I currently earn.

Based upon these new income and tax brackets, and adjusting for the higher standard deduction of $24,000 (for both me and the wife), and eliminating the personal exemption of $8000 (for both me and the wife), and adjusting for a new capital gains tax rate and assuming the dividend tax rate is also no higher than 15%, my tax refund would increase by $4200.

Doesn’t sound too shabby, eh?

The drawbacks

The White House has called this the largest tax cut in history.

Well, that’s kind of true… while all Americans would get a reduction in taxes, the biggest gains – by far! – go to the wealthiest Americans.

First, let’s look at how this helps wealthy Americans. The argument that this isn’t a tax cut for the rich is that it phases out all deductions except for charitable contributions, and mortgage interest; and in return, it greatly increases the standard deduction by about $12,000.

If you are in the (new) highest tax bracket of 35%, then reducing your taxable income by $12,000 is worth $4200. So there’s a freebie.

Next, by reducing the top tax bracket from 39.6% to 35%, then for every dollar you make over $300,000 (estimated top bracket for married filing jointly), your tax burden goes down by 4 cents.

That doesn’t sound like much. But if you’re making $750,000/year, then you would owe (750,000 – 450,000) x 39.6% = $118,800. Under the new Trump plan, you would owe (750,000 – 300,000) x 35% = $157,500. So here you owe more.

But let’s suppose you’re really rich and make $10 million per year. Under the old tax plan, you’d owe $3.7 million. Under the proposed plan, you’d owe $3.4 million. So here, you’d owe $400,000 less.

Under the proposed plan, the higher your income goes, the more you save under the new plan. But it seems weird that you’re better off if you’re already doing pretty well to make that much money.

(This analysis doesn’t account for the higher rates in the lower brackets leading up to the highest bracket)

Second, the wealthiest people don’t earn all their income from salaries which is taxed at the highest rate. Instead, they earn a big chunk from dividends and capital gains.

The average American – myself included – don’t make the much from dividends and capital gains. I do make some but I can’t live on it, not even close. And I have a lot of money invested.

Under the Trump tax plan, which mimics the Republican tax plan, capital gains are now taxed only 15% instead of as ordinary income if you hold for less than a year (in other words, the richest people would pay at 39.6% or even 35%). Let’s assume that dividends are taxed at the same rate, only 15% for both ordinary and qualified dividends.

Since wealthy people earn so much from dividends and capital gains, this drop of up to 24% on some of their earnings represents a huge benefit. If you bought and sold a property and flipped it for $100,000 and claimed it as personal income, whereas before you might be hit with a $39,600 tax bill you would now only have a $15,000 tax bill. That’s a big savings, and only wealthy people can actually do.

Of course, wealthy people only structure their income like this in corporations, but still.

Third, look at those eliminations. Eliminating the estate tax! Today, at the federal level, if you die and your heirs inherit money or property, it is tax free up to $5 million (states may have their own rates). Since almost none of us have almost $5 million to bequeath, this doesn’t matter.

Except to the super rich. Let’s be honest, this is a way to pass down inter-generational wealth without paying taxes on it. It’s a freebie for people who are already wealthy and probably don’t need the tax break.


Fourth, it eliminates the alternative minimum tax (AMT). I don’t even know what this is, all explanations of it online are like “This is complicated.”

What I do know is that in 2005, President Trump earned $150 million and paid $38 million in taxes. But, that was because of the AMT. Had he not had the AMT, he only would have paid $6 million (4%).

Under his plan, he’d have paid (10% x 75,000) + (25% x [300,000 – 75,000 + 1]) + (35% x [150,000,000 – 300,000 + 1 – 24,000]) = $52 million. I’m assuming he is not writing off mortgage interest nor charitable contributions.

So, Trump would end up paying $14 million more. I’m not sure he realizes this.

Fifth, President Trump isn’t going to pass a tax increase on himself. Another part of his plan is to lower the tax rate on corporations from 35% to 15%, and also make that apply to pass-through entities… like President Trump’s real estate partnerships.

If he’s smart enough to shelter all his income in that matter (and let’s face it, I’m sure he is), then he would owe 15% x $150,000,000 = $22,500,000. That’s about $16 million less than he would have paid in 2005.

So there you have it, that’s what’s in it for him.


I don’t see how this tax plan helps the average American. According to the analysis I’ve seen at those two links in this post, these tax cuts only add about 1-2% to 90% of the population’s after tax income, barely anything. The largest earners in the top 1%) see their income go up by 5%, and that’s 5% on a much larger amount (I think the cut-off is around $400,000; so $20,000 at a minimum on the low end of the wealthiest people and way more for the top of that bracket). For the average person, you’ll get a few hundred… maybe.

So yes, it’s the biggest tax cut in history but it basically goes to people who already are well off.

Doesn’t seem like it helps the people who need it the most.

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This is going to be a boring financial post. But I’m typing it up so I can refer back to it next year. This post does not construe tax advice, it’s a strategy that I think works as best I understand it.

It’s the end of 2016 and I’m currently doing some financial planning, specifically around taxes. In year’s past, I always used to estimate my taxes on Jan 1. But this past year, I’ve been doing it since October.

Over the past few years, tax refunds for myself and the wife have not been all that good, so I’ve been trying to come up with creative ways to increase it.

Charitable donations

One way to do it is through charitable donations which reduce your taxable income. The way I used to think it worked is that for every dollar you donate to charity, you get to subtract that dollar from your income and that goes against your taxes.

So, suppose you make $75,000 per year, and during the year you pay 20% of your income in federal income tax (this excludes Social Security and Medicare deductions). This means you would pay $75,000 x 20% = $15,000 in federal income tax.

Then, suppose you give away $7500 to registered charities. I always used to think the calculation worked like this:

Tax owed = (75,000 – 7500) x 0.2 = 13,500

15,000 – 13,500 = 1500 refund

That’s the way I used to think it worked, more or less. But it’s not. Taxes are more complicated than that.

For one thing, you get what’s called a Standard Deduction, and let’s assume it is $10,000 per year. The amount of taxes you pay throughout the year seems to account for this Standard Deduction.

Next, you add up all of your deductions which include charitable donations, deductible interest, sales tax paid, etc. If the sum of all of those is greater than the Standard Deduction, you get to use that against your total income. Thus, you have to give enough charitable donations such that the sum of all of them plus a few more other little deductions is greater than what you would normally for the Standard Deduction.

In this example, $7500 is less than $10,000, so I would not get to write off anything against my taxes even though I gave $7500 to charity. It wouldn’t be enough to reduce my tax liability. I’d have to give at least $10,000.

It’s good to give money to charity, but as a part of tax planning they are not that effective at reducing our taxes unless we give a huge amount [1].

Capital gains and losses

The one place that I have found to be effective is in capital gains and losses.

If you sell a stock or piece of property at a loss, you can use that against your income. So, suppose I have a stock I bought for $10,000 and sell for $5000, that’s a $5000 loss. I can reduce my income, not by the full amount, but a max of $3000 (and carry forward the other $2000 the next year). This is how Donald Trump could have conceivably avoided paying income tax for nearly two decades when he took a $1 billion personal loss in the mid-1990’s.

Many years ago, I bought a bunch of ETFs that track the general market. I’ve bought US stocks, foreign stocks, bonds, and Real Estate Investment Trusts (REITs). Some of these positions are up, and some are down. You would think that after five years they’d all be up, but no – some are still worth less than what I bought them for (roll-eyes.gif). Sometimes diversification doesn’t work that well.

But, what I can do is this – I can sell the stock (ETF) and then buy it back, and then use the “loss” against my income. For example:

a) In June 2014, buy an ETF at $50/share, 100 shares

b) At the end of the year, in December 2016, sell the ETF at $40/share, all 100 shares. I have lost (50 – 40) x 100 = –$1000. I then claim a $1000 loss on my taxes, reducing my taxable income by this amount. This is efficient because it goes right against the taxable income, no deduction magic involved.

c) I then buy the stock back right away at $40/share. Because I’ve only incurred trading costs, if the stock goes up (over time, cross my fingers) and I sell it down the road, I still can think of my starting point as $50/share.

The catch in this plan is that the IRS won’t let you do step (c). They aren’t stupid; you can’t just sell a stock, take the loss, then buy it back simply for the purpose of taking capital losses on your taxes. Instead, they have something called the wash sale rule. You can’t sell something and buy something similar within 30 days and claim the loss on your taxes. If you want to claim the loss, you have to wait at least 30 days before buying back something similar.

So that’s what I do – at the end of the year, I sell some stocks to take the loss, and then I wait 31 days to buy it back. I make no other trades during this period.

There is risk. I could sell it at $40, wait 30 days, and then have to buy it back at $45. That would suck.

Still, I take my chances. It worked out in 2015 because I was able to repurchase at the same price (or even a bit lower); hopefully in 2016 I can do the same in February.

The drawback here is that I am draining all my capital losses now instead of in the future. That is, if I have more income in the future, I have almost no more stocks to sell at losses. I am taking my chances here as well. But at the same time, now that Trump is in power, his proposed tax plan reduces this risk for us because of increases in the Standard Deduction. I’ve done the math on it, and his tax plan is friendly to the wife and I [2].

This works when it is well-executed

In 2015, I executed on this perfectly.

In 2016, I made a blunder. Instead of selling 200 shares (for example) to take a loss, I bought 200 shares. D’oh! I did this twice. Double d’oh! In order to fix this, I then had to sell 400 – the 200 I wanted to sell originally, and then the 200 I just purchased.

Tax-wise, this complicates things. Suppose my buy/sell over time looks like this:

– June 2012 – Buy 75 shares at $50

– Jan 2013 – Buy 80 shares at $55

– Sept 2013 – Buy 70 shares at $48

– June 2014 – Buy 60 shares at $45

It’s now Dec 2016 and the price is $47. What’s my net gain?

My stocks use a First-In, First-Out model. So, if today’s price is $47:

– June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 45 = –$45

Total loss = $910

That leaves me with:

– Sept 2013 – 25 shares acquired at $48

– June 2014 – 60 shares acquired at $45

But of course, I wasn’t paying attention and first bought 200 shares instead of selling, which means I have to sell 400. This screwed up everything, so here’s what I think the situation is:

June 2012 = ($47 – $50) x 75 = –$225

– Jan 2013 = ($47 – $55) x 80 = –$640

– Sept 2013 = ($47 – $48) x 70 = –$70

– June 2014 = ($47 – $45) x 60 = $120

That’s a running total of 285 shares, so now we dip into what I just bought, the 200 shares at today’s price of $47:

– Dec 2016 – ($47 – $47) x 115 = $0

That brings me a net loss of $815 instead of $910. It also means that my future basis for all sales from this batch (85 shares) is now $47.

Not a good thing. I need to pay more attention in the future.

And then there’s dividends

One of the simplest ways to earn money without having to do anything is through dividend-paying stocks. Normally, you think about stock gains as buying low and selling high. But another way to do it is through buying a stock that is stable and paying dividends. There’s a debate over which method is better, but I do find that I like seeing my account have money deposited in it automatically, whereas buy/sell-at-a-gain requires me to do more work (should I sell now? Later? When!). Ideally you’d get growth + dividends, but that’s rare for a single stock. It’s more common through an ETF or mutual fund.

But whereas buying and selling stocks at a gain don’t generate taxes until you actually sell, dividends always make you pay taxes. My broker doesn’t withhold taxes, so all dividends that I get throughout the year add up into my total income and I have to pay taxes on it come the following April. I don’t have to pay taxes in my retirement accounts (401k and Traditional IRA) but I do in my regular brokerage account.

Dividends are interesting because they break down into two types:

  • Qualified dividends, which are taxed at a lower rate. In our tax bracket, they are taxed at 15%. These are usually US-based corporations and some foreign-based corporations, and you must have held them for a certain period of time (e.g., you can’t have bought the day before).
  • Non-qualified dividends, which are taxed as ordinary income (if you are in the 25% or 28% tax bracket, that’s what it is taxed at). Everything that’s not qualified counts as Non-qualified.

Thus, as you can see, if you want to earn income that is taxed most favorably, you should try to get Qualified Dividends.

The problem comes with diversification – you can’t just buy US stocks, you need to own some bonds, foreign stocks/ETFs, and REITs. Unfortunately, REITs’ dividends are classified as Non-qualified, so are bonds, and much of foreign ETFs are, too (at least I think so) [3].

So to optimize, you really should own your non-qualified dividend-paying securities in retirement accounts that are tax-deferred or tax-free; and qualified dividend-paying securities in accounts that are subject to paying taxes.

I did that a couple of years ago because I read the advice online in an article, but without really understanding why. Now I understand why. It turns out that my accounts are not fully optimized because I’ve instead chosen to reduce fees instead of taxes.

Still, the point is, dividends are a good way to earn income that is taxed less than regular income, plus it has no Social Security or Medicare tax.

On my previous years’ tax returns, it looks like all of it is being taxed as Ordinary (Non-qualified) dividends, but my current research suggests that about 2/3 of it should have been taxed as Qualified (15%) and 1/3 taxed as Non-qualified (28%). If I am right that I overpaid, that would reduce my tax liability even more. This is something I need to talk to the accountant about.

Getting rid of some other stocks

A long time ago, I bought shares in Apple. They split 7:1 a few years ago, and I had 98 shares. Apple was a great stock for a long time, increasing in value all the time. However, over the past two years the stock has lost its luster.

I’ve held onto it for three reasons:

1) I hope [4] it will keep going up, it’s Apple after all

2) I’m sitting on a big capital gain I will have to pay taxes on

3) It pays a decent dividend

Yet I’ve been thinking about selling it for a while and picking up some more REITs, there’s a particular stock I want to invest in.

I haven’t invested in it because I am afraid to – I almost bought in the summer when it was at $66, now it is at $55 – a loss of 16%! I think it’s currently on sale and is probably going to go up.

This new stock is a single stock, a REIT that currently pays a 4.26% dividend, far higher than Apple. But it’s only one stock, and that means it’s not diversified. A REIT ETF is VNQ (where I already have shares) and it pays a 4.1% dividend. Less, yes, but less risk.

But after doing the math above, it makes sense to buy a single stock that’s not a big part of my portfolio because it will be taxed as a Qualified Dividend (I think), whereas the more diversified REIT would be taxed as a Non-qualified dividend, and therefore 10-13% higher. That’s a big deal.

So, here’s what I did:

– I bought two more shares in Apple, bringing the total to 100

– I sold a covered call on Apple, expiring in February.

My hope is that the call option is exercised so it gives me spare capital to buy this other stock, otherwise I probably won’t sell Apple. The drawback of this approach is that it means my shares in Apple are hedged, and therefore any dividend Apple pays me count as Non-qualified (if the shares are exercised by then, it won’t matter).

* * * * * * * * * *

I know all of this is complicated. But taxes and investing are complicated.


[1] This is not accurate for other people, because other people get to deduct their mortgage interest and property taxes against their income. The wife and I cannot do this, we can only deduct it against our rental income.

[2] For the record, Hillary Clinton’s tax plan would make almost no difference other than costing us a couple extra hundred dollars. Bernie’s was extremely unfriendly, and would have cost us an extra 12-14 thousand dollars.

Donald Trump’s tax plan will increase the Standard Deduction from $12,600 for a married couple filing jointly to $30,000 for a married couple filing jointly. However, it will also get rid of Exemptions which are added on after you take Itemized Deductions or the Standard Deduction. Still, under the current tax code we can deduct 20,700 from our taxes whereas under Trump we would be able to deduct 30,000.

This means it would be even harder for charitable donations to reduce overall tax liability.

[3] It looks this way for me when I go back over my old statements.

[4] In investing, ‘hope’ is a four-letter word.

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The mortgage is now paid off

8 years ago, I made a huge purchase – I bought a condo for the purposes of using it as an investment.

The goal, for 8 years, never paid off. This was during the recession and I wasn’t able to get it rented quickly, nor get as much as I wanted in rent. As a result, I was taking a financial beating.

I refinanced once a year later, then refinanced again a couple years after that. Along the way the economy recovered so that turned my big monthly loss to a small monthly loss.

That ends now.

For your see, the wife and I successfully paid off her condo in 2013. We then started to pay down mine.

We paid a little bit extra in 2014.

We paid a lot more extra in 2015.

We paid a ton more extra in 2016!

And with that, the place is paid off. The wife recommended we just get rid of the balance once it got down to a certain amount. I agreed, and now the balance is zero.

That means that this month, for the first time ever, it will be a financial boon for me to own that condo. It’s now actually an asset (from the Rich Dad, Poor Dad point of view).


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