Top Tax Reduction Methods

Borrowing Against Shares

This method of borrowing allows share holders to realize the value of their stock market positions as cash, without incurring capital gains tax. It works very simply; rather than selling their shares, the holder can get a cash loan for their equivalent value, using them as collateral. By buying ‘puts’ and ‘calls’ for the shares they can ensure that they can be bought or sold later at a set price, offering protection against any depreciation that may occur.

The holder then has the cash available to do with what they will. If they don’t repay it, the shares go to the bank, but this would occur some time down the line. In the mean time the money gained has been working for them since the original deal, dramatically lessening the impact of the tax bill when it comes.

Deferred Compensation

Many top earning executives when negotiating their contract will be offered shares, often worth much more than their actual salary, as an incentive to put their signature on the dotted line. Of course, owning shares of such high value, will lead to a high tax bill.

However, this eventuality can be side stepped by the executive in question choosing options instead of shares (options being the right to eventually buy the shares when they see fit.)

As gains from options aren’t taxed until the option is exercised (i.e. the executive actually buys the shares) the holder can see the capital at their disposal go up, without being duty bound to pay tax on the increase.

As well as using stock options to this end, some highly paid individuals have their pay put into a deferred compensation plan, where funds can grow without being taxed for decades before any payment is due.

Planned Losses

Taxes payable on income from the sale of shares can be offset by the losses from the sales of shares. By planning ahead a trader can realize the tax benefit of a loss and offset his gains, without actually offloading the shares he has in a losing position.

The IRS forbid traders to sell at a loss and re-buy the same shares within 30 days, however this can be worked around by buying another block of the losing shares, equal to the amount already held, 31 days in advance. Buying ‘puts’ and ‘calls’ will effectively freeze their value, then it’s a case of waiting the 31 days out and selling the original block of shares.

This way the loss occurs, and the trader gets the tax benefit of it, but he still has the same number of those losing shares, at the same value as before.

Borrowing Against Property

To avoid paying tax on the income generated by real estate, its owner can borrow against it in such a manner that they effectively sell the property, without paying capital-gains.

By entering into a partnership with a potential buyer, the owner of the property can contribute their real estate to the partnership, alongside the assets of the other partner. The partnership can then borrow a sum equal to the value of the property using it as collateral, which is then distributed to the seller.

Although the value of the property is now in the owner’s hands in cash form, technically there’s been no sale, so none of the taxes that would have otherwise been charged are applicable.

Joan Bret writes on various tax issues, from filing timely returns, to finding the best ISA rates.

How Inflation has Bolstered Commodity Prices

Perhaps the simplest of all financial misunderstandings is the idea that inflation is a “static” concept that exists in the same way for all markets and regions. This isn’t true. For example, just because a national inflation rate is reported at, say, 5%, doesn’t mean that every market and every region of the nation is experiencing 5% inflation.

Part of the nation could be experiencing 10% inflation, while other regions could be experiencing just 3%. Some markets could be seeing prices go down (like the real estate market) while other markets could be experiencing extreme inflation, like the silver and gold markets are currently.

In this article, we’ll be analyzing specifically different commodity markets to see how they’re fairing during our current inflationary and deflationary cycle.

  • Gold Prices. The price of gold has skyrocketed in the last few years, more out of fear from inflation than the actual inflation itself. Precious metals — including silver as discussed below — are almost always used by investors to hedge against future inflation and out of the fear of the  economic unknown.
  • Silver Prices. Silver has gone up in the last years to the extent that it’s absolutely unsustainable short of hyperinflation. For several years, silver prices have kept increasing. If you own silver, be on the lookout for major corrections or bear markets in the future — it wouldn’t be wrong to keep your eyes on live silver prices just to stay on the safe side.
  • Oil Prices. Crude oil prices have also gone up in the last few months due to inflation, even though a lot of the price jumps have been caused by political turmoil and fears of some OPEC countries shutting off oil exports.
  • Copper Prices. The price of copper is important for economic development and recovery because copper is found in just about all major appliances and electrical equipment. Copper prices probably won’t be dropping anytime soon, considering Chinese growth — inflated, of course — is still rushing forward.

Whenever an asset class is benefiting from inflation, you can almost always be sure it’s a bubble — and bubbles pop. Stock bubbles, real estate bubbles, and commodity bubbles have always popped in the past, and anyone who claims “this time it’s different” is probably wrong.