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Portfolio123 » List all forums » Forum: Simulations and Portfolios » Thread: Sim Results and Taxes |
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Privateer
Advanced Member
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About a year ago, the question was raised, whether it will be possible to include also capital gains tax effects in simulations. At that time, Marco's answer was, to would look into it. Until now, not much has happend about this subject. Some people may ask "what's the problem?" The problem is, imho, that taxes have a tremendous effect on the portflio's overall performance. The vast majority of trades in most sims are shortterm - hence high shortterm capital gain taxes will have to be paid on most gains you make with your system. In Germany i.e, 50% of capital gains from stock investments ( after deduction of 50% of any losses ) are added to your income and taxed like ordinary income with your personal peak tax rate. That means, in reality, I have to pay up to 30% taxes on any gains I made during the year in the following year.( 50% of the capital gain * 60% personal income tax rate, special taxes, taxes for the church etc. ) If I'm not able or willing to pay these capital gains taxes from my ordinary net income, I have to deduct them from my portfolio equity - which also means, I might have to close a substantial part of existing positions and withdraw the necessary amount in order to create the cash needed to pay for the taxes. To "simulate" this effect, I ran some of my sims in 1 year cycles, withdrawing always 30% of the gains achieved and starting the new year with cash only. ( In Germany, we have to pay taxes on 50% of the gains made on stockinvestments, but can also only deduct 50% of the losses ) The remeining Here the effect of one Sim, just for demonstration purposes : My Sim backtested from 03/01 - 12/05 : Starting capital 20.000 USD - Ending capital 145.431 .- USD = ca. 650% return on capital in 5 years - not too bad. Now the same Sim, but ran on yearly basis and withdrawing 30% of gains before starting a new backtesting year : Starting capital 20.000.- USD, Ending capital after taxes for the last year ca. 66.500.- USD. Net gain for the 5 years period after all taxes would have been ca. 46.500 USD or about 225% of my initial capital - 45% annualized gains after tax, or roughly 1/3 of the orginal sim result . Still a nice gain, since most US Small/Midcap funds have a hard time to show for more than 15% annualized gains over the last 5 years period ( not to mention any distributions and management fees from these funds ). However, the impact of taxes on the sim's overall performance is tremendous, since taxes and less capital available for compounding the gains over the years cut deeply in the fomer outstanding results. Notice : There were no stocks in the Sim which have been held longer than 1 calendar year - which would mean for Germany, that at least gains on these stocks would have been tax-exempt. exempt. What is your opinion on this subject - shouldn't there be a solution for including the tax issue in Sims ? Best regards Stefan |
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DennyHalwes
Advanced Member UNITED STATES Joined: Apr 28, 2004 Posts: 1532 Status: Offline |
Privateer, You make some excellent points! I think that most of the P123 members use their IRA’s or other tax deferred accounts for their short term stock trades. However, I am now trading all my and my wife’s tax deferred accounts using P123 Ports as guidance. I would like to add significantly more cash to accounts trading P123 Ports. Since I will not be able to tax defer these new accounts I will need to use P123 Ports that take tax consequences into effect. I would like to test holding winners long term and selling losers short term, etc. I would imagine that the optimum Stop Loss % and other Sell Rules would be significantly different for taxed gains as apposed to tax deferred gains. It would be great to have an option to add both short term and long term tax % adjustments to the Sims. Denny  ---------------------------------------- "The significant problems we face cannot be solved at the same level of thinking that we were at when we created them". Albert Einstein |
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Privateer
Advanced Member
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Hello Denny, thanks for the "thumbs up" on this subject. In Germany, we don't have the advantage of tax deferred / IRA 401 accounts. Up 'til now, the alternative would be, to hold stocks 365 + 1 day. After that period, any capital gains are not anymore taxable - or using futures ( have to check options ). Gains made on futures are considered as "gambling gains" and, as with the lottery gains, are not taxable either - well you see how our tax administration values trading in Futures  .In a nutshell, for me as a german, I really need to have superior results in my stock portfolios when trading shorterm. If a portfolio has an annual turnover of 500% and doesn't perform better than , say 30% annualized profit before taxes with very low risk, it is not really worthwhile to have all the hassle with stock selection, brokers, taxes etc. I'd rather use some good mutual funds and monthly installments to built up my retirement account. And actually, that's what I do aside from my stock trading. I use a blend of Mutual and Indexfunds ( US and European listed ) for longterm, tax-free capital appreciation and some single stocks to add some "pepper and salt". Well, sometimes I serve with too much "salt" but luckily, since I'm a pro in the base and precious metals business and follow these stocks daily, I had a chance to serve me some "hot peppered meals" with more than 100% gains / stock over the last two years as well  - since I hold these stocks long enough - I can enjoy the gains tax free now |
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hees
Member
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Privateer, since compounding is an important factor for you gains, you should try to defer your tax payments as long as possible. In your example you have an approx. annual return of 50%. After taxes your still earned 35%. If you can defer your tax payment till the end of each year and keep your gains invested your annual return would be 41%. If you look at the realized transactions you will notice, that the big winners, which make up for most of your profits often are the stocks your sim keeps for the longest periods. So you could lock in profits by hedging the stock with options and keep it until it was in your port for 365+1 days. You could the buy new stocks on margin, without adding further risk to your port. |
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charley
Advanced Member  UNITED STATES Joined: Jul 8, 2004 Posts: 298 Status: Offline |
Since I am considering a move back to Germany from the US, I was wondering what the tax impact would be on trading. If I understand you correctly, if I have 50,000 profit in short term capital gains, I would pay a 60 percent tax rate on 25,000 ? Being I am not Lutheran or Catholic I would not have to pay the church tax in Germany. My next question if any one knows, are Expatriates allowed to have IRA 401K and Roth tax deferred accounts or must these gains be reported to the German Finanzeamt ? ---------------------------------------- Charley |
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Privateer
Advanced Member
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Hi Charley, happy new year. Unfortunately, I cannot give you any advice on this subject other than : If you are taxed in Germany, any short term capital gains ( ST = holding period below 12 months ) have to be declared and will be added to your regular income , hence they are subject to your personal tax rate according to our progressive tax - schedule for income taxes. I don' tknow about your income, nor about any possible deductions you can make because the latter depends heavily on your individual situation. So I strongly advice, that you contact a tax-consultant specialized on german income tax regulations. In my case, the average tax rate I have to pay is about 46% on my income + 9% on my income tax for the church + 2% tax on my income for rebuilding eastern germany ( used to be only for the first 2 years after unification, but still exists 15 years after - never trust politicians ). However, due to our progressive system, the peak tax rate on the last, say 10.000 EUR of income is much higher then the averegy rate - so every EUR I earn on top of my regular income, be it through renting out an appartment or shortterm capital gains, is taxed with the highest rate. In total, for any additional income I create , tax rate is now close to 60% considering all factors. regards Stefan |
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Privateer
Advanced Member
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hees, thanks for this advice. While I agree, that options can be a good instrument for hedging, I also see the following problems : 1. Quite a number of the stocks selected by my system are not optionable at all 2. hedging with options comes at a cost - I don't mean commissions - I use IB so comissions are not an issue - but many optionable small caps are quite volatile so the "price" for the option might be fairly high due to high implied volatility. 3. Bid/Ask Spreads on option contracts : Many small caps are not really what I would call "liquid stocks", trading only a few thousand shares a day. This is also reflected in th options price, since options on these stocks tend to be even lower in trading volume. 4. Timing / Roll-over : When I use options, I prefer to take the 3 to 6 months out , with a strike close to the actual price of the stock - I'm not gambling with way OTM options having only a couple of weeks left. In order to bridge a 12 month holding period, I might be forced to roll over several times - with additional cost and perhaps worse greeks in the new options. 5. Some of the high performing stocks can make huge gains in the course of only a few days. I travel a lot , so I might not be able to close my options positions in time. Using live stops on thinly traded options is one other route to desaster in the stock markets. So in a nutshell - yes, options can help but one has to consider all aspects of such a hedge carefully before taking such a decision. I do use boxes from time to time, if a stock has risen considerably and stalls for a while. Again, it depends on the options availabilty, pricing and terms whether a box might make sense or not. In most cases, I dedice against it, because being forced to deliver or cover options in thinly traded stocks is always costly. Final and most important reasoning against options is : why holding a stock for longer than my system would do it ? I need the proceeds from the sales to purchase the new stocks at any rebalancing period - after all, my system recomends to get out and I don't want to stick with a possible looser just because of tax considerations. ---------------------------------------- [Edit 1 times, last edit by Privateer at Jan 3, 2006 1:39:54 PM] |
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charley
Advanced Member UNITED STATES Joined: Jul 8, 2004 Posts: 298 Status: Offline |
Privateer Thanks for the feedback .. wish you also ..einen guten Rutsch ins Neue Jahr ---------------------------------------- Charley |
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Privateer
Advanced Member
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You're welcome. Danke für die Guten Wünsche und viel Glück wenn Sie nach Deutschland kommen. |
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vladinvest
Advanced Member
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Like previous posts from you guys - no advise here but just info up to the stretch of my knowledge. Regarding - non taxable income in one country and taxable in other: The fact that you are a taxpayer in one country does not mean you are not in another. The acting and enforced rules can be very complex and one should not be surprised if some of them are against what the taxpayer would consider reasonable. No sarcasm here - purely my opinion. It may turn out that the income in a US based retirement account (401k, ira, roth-ira, ...), while not taxable in US, or taxable under a specific rule, is taxable totally separate in another country if you are a taxpayer in the second. In general the second country will care little about what the tax status if the income in the first country is. One good thing (but maybe still confusingly complex) about the situation is The US has conventions for avoiding dual taxation with many countries (I would expect Germany to be on the list). The rules are specific for the pair of countries and can be found (as with most laws these days) on the web site of the respective agency. Usually such dual taxation avoidance rules will say that you if paid 30% tax in the first country and you owe 50% in the second you only owe 20% in the second effectively. As for whether you are a considered a taxpayer in a specific country – that usually (but not necessarily completely) has to do with what time you spend in the country as a resident during a certain tax year. A lot of countries will treat you as a taxpayer even if you do not spend much time in the country and they will tax the income you earned in another country especially if you are gone on business (even for a long period of time), not to relocate/emigrate. I guess it is a good idea for one to establish herself/himself as a tax payer in the new country if relocating. And follow the rules as a resident from there. If traveling temporarily - to follow the rules of the country they are a resident of. Vlad ---------------------------------------- Mind is like a parachute - it only works when it is open. |
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Re: Sim Results and Taxes
