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Escrow of Capital Gains Taxes on Stocks and Bonds

Gerard Magliocca

Gerard N. Magliocca is the Samuel R. Rosen Professor at the Indiana University Robert H. McKinney School of Law. Professor Magliocca is the author of three books and over twenty articles on constitutional law and intellectual property. He received his undergraduate degree from Stanford, his law degree from Yale, and joined the faculty after two years as an attorney at Covington and Burling and one year as a law clerk for Judge Guido Calabresi on the United States Court of Appeals for the Second Circuit. Professor Magliocca has received the Best New Professor Award and the Black Cane (Most Outstanding Professor) from the student body, and in 2008 held the Fulbright-Dow Distinguished Research Chair of the Roosevelt Study Center in Middelburg, The Netherlands. He was elected to the American Law Institute (ALI) in 2013.

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6 Responses

  1. BDG says:

    Because the income tax has a realization rule — gains are only taxed when the underlying asset is sold or otherwise disposed of (except in the case of certain classes of highly liquid security). So unlike the property tax, which is certain to be collected each year, unrealized capital gains may not be subject to tax in a particular year. The federal tax system also does not charge interest on untaxed gain. This means your proposal would cost customers the time value of money on their untaxed gain and, hence, the brokerage would swiftly go out of business.

    Having said that, there are rules requiring withholding to cover taxes in the event of dispositions of brokerage-held property.

  2. Gerard Magliocca says:

    But you could escrow realized gains, right? Obviously you’d have to adjust for realized losses, so that would make it more complex.

  3. Jake says:

    Escrowing only realized gains would not accomplish much. It might accelerate tax collections by a few months, from the time of the annual tax return filing to the earlier realization date, like robbing Peter to pay Paul.

    As a practical matter a taxpayer who recognizes a significant capital gain is supposed to pay estimated income tax for the quarter in which the gain is recognized. Failing to do so results in a civil penalty that more or less covers the time value of money. Forcing brokerages to escrow the tax due on recognized capital gains would merely shift the tax payment burden from individual taxpayers to brokerages, with probable efficiency losses.

  4. Shag from Brookline says:

    A taxpayer might have capital or other realized losses (including loss carry forwards) involving assets not in the brokerage account that might offset gains in the brokerage account. Gerard’s suggestion presents too many tax complications, much more so than involved with wage withholdings.

  5. Rich Rostrom says:

    Because property taxes due are highly predictable and always due. The tax due on a given property can be narrowly estimated well in advance, and is cabined from all other property tax transactions, or indeed almost any other circumstance.

    Capital gains taxes due are not predictable, even after the gain is realized. The payer’s aggregate gains may change radically later in the year if there are additional transactions. And the tax due from a payer is based on all his transactions in aggregate – he may execute capital-gains transactions through multiple brokers.

    Requiring escrow of estimated capital-gains taxes due on each separate account could cause serious hardship to a payer who needs the full amount of his profit from a transaction with one broker to offset losses incurred with another broker and avoid margin calls or foreclosures.

    Also, I am pretty sure that capital-gains income can be offset by non-capital losses, such as deductable casualty losses or medical expenses. Finally, there is no certainty that that the capital gains rate on the income will be lower than the ordinary income rate; the payer has the choice of rates in such cases.

    None of this applies to property taxes.

  6. Vipul Hove says:

    Capital Gains Tax (CGT) is chargeable and due in respect of gains made from sell, transfer and otherwise disposal of assets.
    Capital Gains Tax can be very harsh and punishing if not planned for. That said, careful expert planning for CGT can result in significant saving of the tax and result in more of the disposal proceeds in your pocket and as less as possible of the capital gains tax.

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