Re: Question for investors, traders...and investment types (and for Michael Ross too!)

Elizabeth,

You are quite correct, there are many other ways you can structure your trading so it is more tax effective.

As part of my studies in Australia, I'm doing a minor in Taxation.

As part of of my everyday life, I invest through three structures, all with differing tax treatments:

- Under my own name, on my personal account
- Through my company, at the company tax rate
- Through my self-managed superannuation fund, at the superannuation fund rate (also similar to a 401k)

I also think that Australia have some of the highest tax rates in the world. For example, with superannuation (401k, retirement benefits, etc), I think it's one of the only countries in the world that taxes contributions, income during the life of the fund, AND benefits that are paid out on retirement (although at a lower rate than the lowest personal tax rate).

So yes, you are quite right in pointing out that you can adopt more tax effective structures for your trading and investing. :)

Regards,

Thomas.

> Hi Thomas, very good reasons you give for
> long term investing. But, here are some of
> my arguments which might not apply to the
> majority of
> investors.

> I too am unfamiliar with US tax. I know a
> bit about Canada, although I should be more
> knowledgeable.

> In Canada, I know many 'home' traders don't
> do this. But I'm sure the heavy hitters do,
> which we only recently discovered. We can
> trade both stocks or options (no puts or
> shorts) within
> our RRSP (Registered Retirement Savings
> Plan), equivalent to the 401K in the US. So,
> as long as we don't withdraw any of our
> profits, and just
> keep reinvesting them, we won't be taxed
> until we retire or withdraw funds. And
> hopefully, when we retire, we'll need a lot
> less to live on
> and will just be taxed in the lowest tax
> bracket at that stage. So, this is one
> downside to our gains. In our case, it would
> be a shame to just let the money sit there
> for 25 years and do nothing.

> We also have another account for trading,
> which we use for our operating/living
> expenses. But, if you're operating as a
> Corporation, and depending on the kind of
> 'other' income streams you have, we end up
> paying very little tax on our gains, as we
> offset this by all the deductions and tax
> advantages we get by operating as a
> corporation. So, this scenario that you're
> describing, while it might be applicable for
> some, does not apply across the board, as
> you so rightly mention.

> If you're set up as a corporation, and this
> is your only income, you can choose to leave
> a large chunk of your profits in the
> company, pay the
> directors dividends, etc. etc. We have a CA
> who does our taxes and I really don't pay
> attention to this end of things. Enough
> other things to worry about. But I know a
> lot of traders who pay very little tax on
> their capital gains. But you can only
> achieve this by being set up as a corp.
> Perhaps they also use some creative
> accounting?? I don't know.

> I have a friend who is an IT contractor, set
> up as a corp. She has 3 kids, and several
> nieces and nephews. Through her corporation
> she is able to pay herself and hire her
> family to do several jobs to run her
> business. Last year she earned $150K, plus
> $10K in capital gains. She 'told me' that
> she paid $8,000 in taxes. I believe her
> because she is a good friend. Oh, I forgot
> to mention. In Canada, if we max out on our
> RRSP contributions, this further reduces our
> taxable income. So, with all these combined
> tax deductions, some of us can significantly
> reduce our taxes. But the tax system does
> appear to favour the middle income to
> wealthy.

> Regards,

> Eliz.