Michael Graetz’s two laws of tax

From Matt Levine on April 28:

I like to cite, around here, Michael Graetz’s two laws of tax: It is always better to make more money than less money, and it is always better to die later than sooner.

This seems correct. And I love the follow-on line of thinking:

But I am always excited to find exceptions. One important, but sometimes violated, corollary of the first law is that it should never be in your financial interest to give money away. If you have $100 and you give it to charity, you (1) are out $100 but (2) have a $100 tax deduction. If you have a lot of income and your tax rate is 40%, that deduction should save you $40. Net, you are out $60.

But you can do a bit better than that. Let’s say that you have stock in your company that you got for $0 (you were the founder, etc.) and that is now worth $100. If you sell it, you will get $100, all of which will be taxable as capital gains. Let’s say the capital gains rate is 20%; you’ll get $80. If instead you donate it to charity, you won’t have the $80, but you will get a $100 tax deduction that you can use against your ordinary income. If your tax rate (the marginal rate on your ordinary income) is 40%, that should save you $40. Eighty is more than 40 so this is not a good trade, but it’s closer.

So how do we turn this into a good trade? How do you give away something which, to you, is worth not that much but in the eyes of the government tax collector is worth a lot?

– You have zero-basis stock that is “really” worth $100, but that happens to be trading at $300 right now because the market doesn’t know the bad news that you know. If you sell it, you get $300, pay 20% tax, keep $240, and go to prison for insider trading. Or you can wait until the news is public, sell it for $100, pay 20% tax, keep $80 and avoid prison.

– But if you donate it while it’s still trading at $300, you get a $300 tax deduction, which is worth $120, which is more than $80. And you don’t go to prison because you never traded the stock while you had inside information.

This also works with incredibly low-basis altcoins. Buy a token at some ten-thousandths of a penny price, wait for it to appreciate to $0.50/token so that now your ten million tokens are worth a lot, give that away – and profit on the tax deduction! You have to have $5 million in other income which needs sheltering, of course, but this can (maybe) work.

As Matt Levine would say: not legal advice!

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