how to save a tax from capital gains legally?

Discussion in 'Taxes and Accounting' started by trend2009, Jan 18, 2010.

  1. Suppose you have a trading model that generates 100% gain per year. without profit tax, after 5 years, your total gain is 2^5=32 times; but if you pay tax, let's say, it is 50%, after 5 years, the total gain is 1.5^5=7.59. You can see after 5 years, without tax, you make 4 times more money, and such compounding is the beauty of the financial field. I believe if you can defer the tax such as in 401k or Roth IRA, eventually you pay more money to the government. the question is, how to save the tax legally? I am not a citizen of USA, but hold a green card. any other ways to avoid the tax legally such as starting up a offshore hedge fund and move to overseas? if the trading is taken place in USA, does the law require to pay the tax anyway?
  2. heech


    Basically, the answer is you can't avoid these taxes legally.

    Unless you're trading a tax-deferred account (IRA/retirement account), as long as you maintain your US residency, you *must* report all global income (including capital gains) at the end of the year to the IRS, and be taxed accordingly. This also applies to any investment capital you try to move into offshore entities.

    It doesn't even matter if you're trading Hong Kong stocks with a Hong Kong corporate entity; as long as you keep your US Green Card, you are legally obligated to report those capital gains and pay taxes.
  3. a roth ira is not tax deferred. gains are tax exempt. it is the only legal way for americans to trade tax free.
    the difficulty is getting enough money into one to trade with a good sized account.
    by the way. you are dreaming.
  4. how about if I open an offshore hedge fund, and move capital to that fund, and I hold, say, 100% share of the company. then, the company opens an brokerage account in US. At the year's end, the profit in the company is 1 million for example, and I take home 100k as salary acting as the fund manager. so I have only to pay tax on the 100k instead of 1 million. is that legal? Sure eventually when I bring all money home, I have to pay tax, but the tax is deferred.

  5. First off, I am no tax attorney or accountant, and would refer you to the rich literature on this subject available in any major bookstore right now. Specifically, Hoyt Barber has written several thorough, clear books on this topic and is a good authority to get one started in this adventure, and it really can be one.

    Achieving the goal implied in your question has been a passion of mine for a long time now. I don't claim to have found a perfect answer, but I think I've stumbled across some leads. The first and easiest action you might take is to limit your trading activities to either stocks held a year or more so you can avoid short term capital gains (which isn't an option for me, as I'm a day-trader), or simply restrict your trading to futures, futures options, and forex. If you trade futures products and forex, the IRS, in a rare gesture of fairness, agrees to tax capital gains at a maximum rate of 23%, and that's if you're in the highest tax bracket. There is a 60/40 rule applying to futures and forex (IRC paragraph1256 contracts) meaning that 60% of all your cap gains will be taxed as long term gains and 40% will be taxed as short term gains, even if the trade is opened and closed in 30 seconds. This is because of the typically short term nature of futures trading. Due to the high leverage, one can't be expected to hold positions a year or more, and shouldn't be penalized for it. What I find ironic, is that if I have $60,000 in my account, I can indeed afford to simply buy and hold an ES contract, as it is worth just under $60,000 right now. And with 60K, you can own outright about three corn contracts. Thus, buying and holding is indeed perfectly feasible for futures as well, but don't tell that to the IRS.

    Now, having created a trading framework in which one can only be taxed a maximum of 23% federally, the next step is to establish residency in a tax-free state, such as Washington, Nevada, Texas, Tennessee, Florida, and others, so that one's total annual tax, both state and federal, is only 23%. I don't know about you, but I can live with that. It can often be very easy to pull that off and doesn't always require full-time residency in the tax-free state. Many people, for example, make their summer homes in Washington and live elsewhere during the colder parts of the year. Thus, you can make your home base Washington and avoid the greedy clutches of state tax boards elsewhere. I have no compunction about avoiding state taxes on trading revenues, as this is a business that takes place in either cyberspace, or if in a physical location, at the exchange, which is in another state than mine, in any case. Residency requirements vary from state to state, so you'll have to look into the particulars. From what I can tell, a Washington residency may be the easiest to pull off without totally up a moving for good. I am still doing my own research on this.

    You hit upon another interesting solution when you mentioned appointing your trading account to an offshore entity. I don't know how I could pull that off, as you have to be able to trust other people, and I just don't. But, if you wanted to give it a whirl, you'd have to set up a non-foreign controlled corporation, meaning that at least 51% of the shareholders are not US citizens. You can certainly pay lawyers in Panama or Belize to take a majority shareholder status of your corporation, then open a trading account in the name of this corporation and put your money in it, but aren't you taking a big risk that these majority share-holders will abscond with your capital at some point? They would have the legal recourse to do so. I know someone who is doing this with his inlaws--even bigger risk, it seems to me--but he trusts them implicitly. So yes, if you have a way of setting up an entity in a tax-free offshore jurisdiction and you keep yourself out of it for purposes of ownership, you can legally avoid paying taxes, at least until you patriate the gains in your own name, by, for example, having the offshore entity pay you a salary.

    Best of luck avoiding taxes!
  6. heech


    No. I've looked into this before, and US tax law is very explicit on reporting all profits; you're not allowed to defer. There's really no way around it, or people wouldn't have been paying UBS to sneak their money into Switzerland.
  7. Steve, many thanks. your input is greatly appreciated. I will think about it offshore choice. I am a day trader on equity, unfortunately.

  8. and of course the other thought: "pay your taxes and stop complaining."
  9. Div_Arb


    Hey it's your patriotic duty, right? :(
  10. if you have a model that can compound the capital, saving the tax is good for you and for the nation, because at the end you have to pay the tax, but in a larger sum, with the capital better utilized than in the hands of the government.

    #10     Jan 20, 2010