Has anyone ever challenged the taxation of phantom gains from inflation?

Higashiyama

A test case:

Suppose I buy an ounce of gold for 1000. During the year, there is 10 % inflation. Gold also increases by 10 %. At the end of the year, I sell my gold. I write a letter to the IRS explaining this transaction, and offering the opinion that I made no gain on the transaction, and therefore am declaring no income. Clearly, the IRS will challenge my logic. Shouldn't I be able to win this case in a reasonable court?

The language of the 16th amendment is as follows:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

I believe I have a very strong argument in saying that I had no income from this transaction - my starting and ending dollar amounts were of equal value. The amendment does not allow for a tax on wealth.

I would be willing to do this, if I could find a top notch lawyer to take the case pro-bono!

jmski52

I've been thinking about this situation recently as well. The problem is that the Tax Code is written to be enforced, not to be reasonable and not to offer rational ways to debate the question of the inflation tax.

There was a famous case during FDR's depression years where a tax on food raised by a farm family was going to be levied for the food's "market value" even though the family consumed the food and didn't sell any of it. The government's reasoning was that the food would have been sellable and by consuming it, the family effectively took it off the market, thereby depriving society of the food, therefore it should be taxed as income at the value that it could have been sold for.

The government lost that one, but they're getting back to that same attitude in Washington DC these days. But I digress.

To challenge the phantom gains from inflation, you would have to show that the gold wouldn't buy any more when you sold it than when you bought it. That's the flip side of saying that the dollar lost value over the same period. Seems straightforward enough, doesn't it?

If the whole government weren't corrupt, I'd say that the effort would be worthwhile. Since that is clearly not the case, I'd say that unless Hank Paulson is your father-in-law or unless Timmy Geithner is your brother-in-law, the cost and aggravation would simply not be worth it.

Justacommeman

They would throw you in jail if you made a stink about it. You would be dangerous. I would advise against it

Peter Schiff is an aquintance of mine and I work with his mother. His father Irwin is in prision for challenging the tax code. He will die there.

MJ

illini420

you're taxed on your nominal gains, not your real gains... sorry, you'll be paying the tax.

Higashiyama

"you're taxed on your nominal gains, not your real gains... sorry, you'll be paying the tax"

But has this approach ever been challenged? It really doesn't seem consistent with the 16th amendment. Nominal gains aren't real income. The income tax calculation is actually a hybrid income/wealth tax.

jmski52

They would throw you in jail if you made a stink about it. You would be dangerous. I would advise against it

Peter Schiff is an aquintance of mine and I work with his mother. His father Irwin is in prision for challenging the tax code. He will die there.

There's your real answer.

The ONLY way to challenge the government is to get people with your point of view elected, and once they get elected, to make sure that they do what they said they'd do when they were campaigning.

It's a very tough nut.

Added - a very tough nut, but after 59 years here, I'm convinced that is the only way to go.

roadrunner

There was no overall inflation or price inflation from 1793-1933. During that period of time there was no real reason to ever consider this question other than during short bursts of inflation. But that was a system strongly linked to gold. Once FDR severed the first head of the gold link things changed. Even if this issue were brought to court the IRS would trot out the CPI as the "all-knowing" and end-all expert on whether general price inflation is occuring or not.

Even if gold did go up by 10% they over the past year the CPI would show that "general" prices fell during that period. They would then levy an additional tax on top of the 10% to account for that. The CPI has been "adjusted" numerous times over the past 25 years such that it has a much smaller relationship to price changes in the economy than it did in 1980. Still, the govt would probably argue that rising prices have nothing to do with the printing of money, excess credit, or other such "nonsense." Prices rise because of "bad" and greedy people like oil and gold company CEO's!

roadrunner

CaptHenway

"You can't fight City Hall!"
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Wile E. Coyote

AboutAg

<< <i>"you're taxed on your nominal gains, not your real gains... sorry, you'll be paying the tax"

But has this approach ever been challenged? It really doesn't seem consistent with the 16th amendment. Nominal gains aren't real income. The income tax calculation is actually a hybrid income/wealth tax. >>



You may want to check out http://www.irs.gov/pub/irs-utl/friv_tax.pdf . It covers frivolous tax arguments, and the IRS position on them. Interestingly, the word 'inflation' only appears in there once, in an unrelated context. So it looks like there aren't many people out there trying to make this claim (or there are, and the IRS allows it).

Higashiyama

Thanks for the many thoughts.

RR - it's an interesting point that the issue would not have been envisioned in 1913. It just slipped in there!

If inflation heats up, I really think taxation of inflation will become an issue, especially when owners of TIPS realize how unfavorable the tax treatment is on them.

There are realistic scenarios where cash flow could be negative on an inflation adjusted bond. For example, if the coupon is 3 %, inflation is 15 %, and someone is in a 40 % marginal tax bracket, their cash flow for year would be 3 % - .4 x 15 % = negative 3 %. I'm surprised this is not pointed out more frequently, but I am sure it will be as soon as inflation heats up.

derryb

That's why they call inflation "the hidden tax."

roadrunner

RR - it's an interesting point that the issue would not have been envisioned in 1913. It just slipped in there!

Well I'm sure the powers behind the FED knew what the game plan was. For one they knew War was on the horizon and they wanted a means to fund it without having to really pay for it (ie print money). Also following the banking/credit crisis in 1907 the bankers didn't want to lose money like that ever again. From that point on creating a FED-like entity was priority #1. Of course these 2 reasons were never presented to U.S. lawmakers.

roadrunner

derryb

They have a special place for those that challenge taxes.

Weiss

The 2009 wages you owe taxes on next month have been eroded by inflation beginning the instant you cashed your first paycheck in January of last year. Make that argument first.

DeepCoin

Actually trying something like this in real life is a fool's errand IMHO. If something like was ever to have gotten traction it would have been in the 80s when inflation was high. The IRS does not take kindly to people interpreting the rules differently. They have lots of lawyers on staff to make t he point. Your arms are too short to box with the IRS (to completely steal a phrase).

KUCH

AND now we've got 18,000 NEW IRS Agents to collect all the new tax money from the healthcare bill.

sumrtym

That's a losing argument at the beginning.

Let me put this another way....are you in favor if we were to enter a deflationary period of paying tax on whatever money you have (in the bank, gold, silver, etc) because it now buys more than it did and thus the increased buying power should be counted as income?

Besides that if you're thinking logically you'd say "no", there's the absolute nightmare of trying to track such things and compute the tax that would result. Personally, I way in on the side of wanting a simpler tax code, not more complex. I still remember calling the IRS a number of years ago to ask a RELATIVELY simple question but to which I couldn't find a straight answer in the materials I had access to. They couldn't answer it on the phone, had to refer it to a "supervisor", called me back 2 days later, and STILL couldn't really give me an answer (they weren't sure themselves). Now, if the IRS can't answer my question themselves, then I think just maybe the tax code needs to be redone, and by that I mean simplified.

Yes, I'm one of those that would rather have 20-40% sales taxes rather than income taxes, with food and clothing exempted.

Higashiyama

sumrtym -

That's a trade I'd definitely be willing to make -- ie, paying taxes on realized deflationary gains, in return for not paying taxes on inflationary ones. Keep in mind that it is only realized gains that would be taxed. If I buy and hold gold, it would not be taxed. It is conceivable though very unlikely that we could experience long term deflation.

With regard to complexity -- I definitely agree with you that we should move to a simpler tax code. But, I would still eliminate taxes on phantom gains I could develop a formula that would be fair and not absurdly hard to implement.

jmski52

It's easy to promise that you won't tax earnings over $250,000 or $200,000 or $150,000 - whatever the moving target number is - when you have a pretty good idea that tax rates are going up, tax credits are expiring and inflation is set to take off like a bottle rocket. While your at it, if you expect to be collecting lots more taxes, you really do need another 16,000 to 17,000 agents.

And if you are intent on stealing, er, I mean redistributing income - you really have no problem with heaping more debt load on the people and inflating to raise prices and salaries. Very destructive policies coming.

cohodk

Perhaps folk with skin in the game would have influence...

https://www.bloomberg.com/news/articles/2018-08-30/trump-says-thinking-about-indexing-capital-gains-to-inflation

ricko

I am certain you would lose that battle.... What a nightmare that would produce for figuring such things, both in inflation and then in deflation periods. Taxation is a nightmare as it is... and look at Connecticut...they are going to tax food and medicine... Where does it stop?? Cheers, RickO

derryb

Would affect capital gains across the board on all assets, IRS would never permit the loss of tax revenue.

bronco2078

you challenge it by not telling

3stars

Need to stop buying precious metals and invest in aluminum foil...