7 ms·

It's like a tax free dividend. Dividends are taxable but if a company uses the cash they would have spent on a dividend on a buy back there's no taxable event f

It's like a tax free dividend. Dividends are taxable but if a company uses the cash they would have spent on a dividend on a buy back there's no taxable event for the investors. Those investors who want the cash can sell and pay the tax and the rest enjoy the higher share price

musicale 1y ago
Incentivizing short-term investors to dump stock by boosting the price temporarily? I guess that's a strategy.
- Kirby64 1y ago
  In a purely rational market, buying back shares doesn't boost stock price temporarily... it boosts it forever. You buy back shares and 'retire' them, thereby making everyone else's shares more valuable. Now, if you're using debt to finance share buy backs, then yeah... it's a short term ploy. But most companies don't use buy backs this way.
  - kd5bjo 1y ago
    > You buy back shares and 'retire' them, thereby making everyone else's shares more valuable. But the cash outflow to purchase those shares makes the company less valuable at the same time. In a completely efficient market, the amount of money that the company pays to buy back a share should be exactly balanced by the ownership percentage of that share, resulting in no net change to the price of the company's other shares.
    - mattclarkdotnet 1y ago
      Yes but as a shareholder I get an untaxed unrealised capital gain instead of a taxable dividend. I’m not a fan of taxing unrealised capital gains but this particular loophole could do with closing
      - triceratops 1y ago
        To close the loophole, ban buybacks. Or at least severely restrict them in some way. If a company wants to return profits let them issue dividends.
      - victorbjorklund 1y ago
        But the tax will be paid when the stock is sold. It is more like letting the investor choose when to realise the gain and trigger the tax vs dividend that will happen regardless of wether the investor needs the money at that time or not.
        conception 1y ago
        Or the stock is used as collateral for a tax free loan and never sold. Tax loophole engaged!
        Nemi 1y ago
        The loan may be tax free, but it is surely not interest free.
        Kirby64 1y ago
        For the ultra-wealthy, it doesn't matter. Look up "Buy, borrow, die".
        ndriscoll 1y ago
        People who talk about "buy, borrow, die" never seem to mention interest. Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes if you realized it every year. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead? That's also assuming you're not already receiving some dividends/income or can't be selective about tax lots to sell. You could say "well you can simply accumulate an interest balance without ever repaying the loan, and hope the assets appreciate faster than the interest compounds", but then shouldn't you have already levered up prior to ever considering taxes? So taking on additional loans pushes you outside of your risk tolerance? Do you borrow or pay taxes depending on your portfolio performance? How does this work? I'd be interested in seeing what someone with an actual finance background has to say about this "strategy". The popular image is just "free money", but while I have enough assets to start buying things with margin loans myself, I'm failing to see how to get some of that free money. It seems generally reasonable that using an asset to collateralize a loan should be a taxable event, but the narrative about how this gets used seems off to me when trying to figure out the details.

musicale 1y ago

Incentivizing short-term investors to dump stock by boosting the price temporarily? I guess that's a strategy.

Kirby64 1y ago
In a purely rational market, buying back shares doesn't boost stock price temporarily... it boosts it forever. You buy back shares and 'retire' them, thereby making everyone else's shares more valuable. Now, if you're using debt to finance share buy backs, then yeah... it's a short term ploy. But most companies don't use buy backs this way.
- kd5bjo 1y ago
  > You buy back shares and 'retire' them, thereby making everyone else's shares more valuable. But the cash outflow to purchase those shares makes the company less valuable at the same time. In a completely efficient market, the amount of money that the company pays to buy back a share should be exactly balanced by the ownership percentage of that share, resulting in no net change to the price of the company's other shares.
  - mattclarkdotnet 1y ago
    Yes but as a shareholder I get an untaxed unrealised capital gain instead of a taxable dividend. I’m not a fan of taxing unrealised capital gains but this particular loophole could do with closing
    - triceratops 1y ago
      To close the loophole, ban buybacks. Or at least severely restrict them in some way. If a company wants to return profits let them issue dividends.
    - victorbjorklund 1y ago
      But the tax will be paid when the stock is sold. It is more like letting the investor choose when to realise the gain and trigger the tax vs dividend that will happen regardless of wether the investor needs the money at that time or not.
      - conception 1y ago
        Or the stock is used as collateral for a tax free loan and never sold. Tax loophole engaged!
        Nemi 1y ago
        The loan may be tax free, but it is surely not interest free.
        Kirby64 1y ago
        For the ultra-wealthy, it doesn't matter. Look up "Buy, borrow, die".
        ndriscoll 1y ago
        People who talk about "buy, borrow, die" never seem to mention interest. Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes if you realized it every year. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead? That's also assuming you're not already receiving some dividends/income or can't be selective about tax lots to sell. You could say "well you can simply accumulate an interest balance without ever repaying the loan, and hope the assets appreciate faster than the interest compounds", but then shouldn't you have already levered up prior to ever considering taxes? So taking on additional loans pushes you outside of your risk tolerance? Do you borrow or pay taxes depending on your portfolio performance? How does this work? I'd be interested in seeing what someone with an actual finance background has to say about this "strategy". The popular image is just "free money", but while I have enough assets to start buying things with margin loans myself, I'm failing to see how to get some of that free money. It seems generally reasonable that using an asset to collateralize a loan should be a taxable event, but the narrative about how this gets used seems off to me when trying to figure out the details.