Affects of capital gains tax during hyperinflation
I’ve been trying to find an answer to a question regarding capital gains tax and the effect it will have selling gold if hyperinflation occurs.
Unless CGT coins are were sold/purchased couldn’t it lead to a loss of wealth? For example, if a price increase of a bar of gold was entirely due to the devaluing of the currency and it was taxed by %20 then wouldn’t you end up losing 20% of your wealth?
I’m a bit concerned over a recent purchase so if anyone is able to give an answer it would be very much appreciated.
Thanks for any advice!
I am not a tax advisor, nor do I play on on TV… But, I my viewpoint is… any tax I would pay (aside from some B.S. 95% windfall tax) may very well be nothing compared to the loss of purchasing power had I been holding all of that in fiat, or the “”markets””.
best to you,
e & c
Not ideal but this is true I suppose.
Thanks for responding e & c.
The effects of capitol gains taxes on everything is going to be real bad if real bad inflation !
For example, selling a house. In California, they tax the gain too, not just the Fed’s, doesnt matter if you are just putting it all in another house either, if the second house costs less on paper, even if all the “gain” from the first house goes into the second, you owe. So much for trading down to a house to get rid of house payment
You are right, lorro14: A steep tax on nominal capital gains would be an efficient way for governments to collect most of the wealth people held before a hyperinflation starts. Since that policy covers every discoverable trade of every marketable asset – cryptocurrency, precious metal, commodity, real estate, foreign currency, stock, bond, option – there is no special regulation required for specific assets. Rather than confiscate gold, the government can confiscate much of its value when it is sold.
During a hyperinflation this might be slightly less efficient from the government perspective, but it is really hard for taxpayers to escape. Imagine that $1 of some asset or inventory has inflated to $100, and the capital gains tax is 50%. You will owe nearly $50 in tax when you sell it. If you had to pay quarterly estimated taxes or sales taxes, and could expect prices to double during the quarter, you could sell products or assets on day 1 for $100 and buy stuff that doubles to $200 by day 90. On that day you sell a fourth of the stuff to raise the $50 capital gain owed from day 1, but the basis on that $50 was $25, so you also owe 50% on your $25 gain on that fourth, and so you sell another sixteenth ($12.50) of stuff on day 90, but owe additional taxes on that, and so on, ultimately paying (I think) another $17 in capital gains tax. Instead of paying 50% of your asset’s value, you pay 67/200ths, or 33%. That is still steep, and still a net loss in real wealth, but slightly less onerous. If the government wants to minimize these games (and black marketing), it might try to devalue the currency all at once.
Ejh237 also is right: after a year of holding fiat in the above example, you would have lost 15/16ths of your wealth (1-(0.5)^4, >93% ‘tax’ by inflation). What to do? If you anticipate a hyperinflation and nominal capital gains taxes, you could invest now in what you expect to use later. When buying shoes or gloves that you will wear out, you could buy two sets and store one where mice can’t find them. Later you will have something you might have bought with investment income, but you paid no capital gains taxes. It would be neighborly to do this before the hyperinflation, to avoid adding fuel to the fire during the inflation. If you were somehow certain that you faced a hyperinflation and had good credit, you could borrow money long term to get an orchard or plant a market garden, and plan to repay the loan with a single basket of produce – but don’t bet big and guess wrong. You can lose everything if deflation ensues.
Oh I see what you mean Adamah. I hadn’t thought of the possibility of trying to get some of the money back by buying something else. Sounds quite confusing and it would be very annoying if it came to that.
I’m kicking myself for not educating myself about this tax before spending money on a couple of bars when I should have gotten coins. I was in a bit of a panic due to the virus at the time. I’ll just have to remember not to do this kind of thing again in future.
But thanks for the detailed explanation Adamah.