The recently proposed senate bill has impacted the Forex market already. Most of the biggest and popular Forex companies/brokers are panicking and convincing clients to sell their shares and stocks. Brokers also believe that the new taxation means making money in Forex trading might be quite expensive. Under the senate plan, minimizing profits will be a hard task. To answer the above question it is important to know what the bill intends to do.
What does the proposed bill entail?
Investors, over the years, have devised ways of reducing their capital gains tax on stocks but the Senate bill might create a limitation which will increase the taxes that investors will be forced to pay. The proposed legislation requires investors who have brokerage accounts that are taxable have the mandate to offload any shares that they have had for the longest period. They are calling this process FIFO which means first in first out.
Congress members are trying to do away with the lower tax rates in the country. They are meant to ensure the costs of their 10-year plan does not exceed $1.5 trillion contrary to the laws concerning budgets in the senate. According to a study done by the Taxation Joint Committee, it was predicted that the sale of stocks was expected to rise up to $2.4 billion.
With the current rules on taxation, investors are able to decide the stocks to sell which allows them to reduce their taxes based on their profits. Take for example an investor bought shares from Microsoft twice in 1998 and later in 2014 if the trader decided to offload these shares today with the a prevailing trading price going for $150,the tax imposed on the investor would be less if he sold the last shares he bought as opposed to the initial ones he bought. The 2014 shares might have cost $80 while those from 1998 might have cost $2.
One resulting effect of this is that brokers are now urging their clients to liquidate their shares before the senate bill, which has the FIFO change, is passed. Prior to the proposal, investors had the power to select any stocks that they wished to dispose which is what they are meant to do for tax loss selling. The bill also has an impact on various investors starting from large family owned corporations to traders and hedge funds.
Various tax firms have taken it upon themselves to look for other ways that can assist the investors to maintain their tax benefits, in case the proposed legislations are passed. It is now possible for investors to evade this by splitting their holdings and spreading them out to various money managers or traders. They can also separate low and high basis stocks.
What are the tax strategies?
By using the theoretical Microsoft investor, earlier mentioned, a trader can take the stocks bought in 1998 and put them under one trading account while also putting the ones bought in 2014 in another account. This means the broker has one remaining lot that can be sold and the best case scenario would be to sell the 2014 share and hold on to the 1998 shares. Normally, the IRS reviews basis reports by brokers based on accounts held by the brokers. There are high chances that the IRS will create an anti-abuse law that stops tax payers from avoiding the intention of the FIFO bill. Another way to avoid the taxation would be to take a significant amount of stocks into a family-owned partnership, which is a different tax unit. These strategies are just preliminaries seeing as the bill is still pending.
The bill might impact the donations of shares as the existing law allows investors to freely donate shares that would incur a large capital gain tax if they were to be sold. This is beneficial to non-profits as donated shares can be worth up to $15000 when given to charity and worth $10000 to a single person after taxes. By taking away one of the incentives behind donating to charity the process is slowed down.
The uncertainty is making wealth experts modify their tax advice and they are telling investors that have large capital gains to sell the stock immediately while they can control the cost basis. Others are speculating that the senate are trying to make investors taxes simple by using The FIFO change. However at the end of the day, investors would love the power to select the shares they sell while minimizing their taxes.
The news of the senate bill has affected the dollar bill which has gone down as investors are trying to grasp the entire concept of the tax cut bill. The Republicans have differed with the Congress on some of the issues such as the reduction for local and state taxes, the tax inheritance and the corporate income tax. The version proposed by the Republican aims to delay corporate reductions by a year and wants to do away with the Obamacare personal mandate. The plans are meant to benefit business but the technology corporations may not enjoy the benefits mostly because they keep most of their money off shore and will be subjected to higher tax in the coming year.
The bill which was approved by the House of Representatives caused an uproar with protesters taking to the streets to march against what they termed as killing investors and Forex trading. The tax bill’s impact is heavily felt by the middle class citizens whereas the multi-millionaires and big corporations have little to lose. The sting will be felt by the Wall Street population but the common American will suffer most and this is a bad effect for the long term economic stability of the country.
The Senate indeed plans to impose restrictions to Forex business indirectly by using the proposed tax laws. The House of Representatives have already approved the bill and the final decision rests with the senate. Forex brokers are already devising plans that will help them save on money and their business. The long term effects will be felt most by the less wealthy in the society.