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Thursday, January 10, 2008

Capital Gains & Taxes

Don't whine about taxes, it's pointless. If you have a capital gain pay the taxes and be happy you have money to pay them with. Worrying about taxes led to some of my biggest mistakes in investing.

One thing mutual funds, and even some stocks do, is to encourage you to sign up for automatic reinvestment. You get a dividend, or a capital gain, and instead of sending you the actual money, they reinvest it for you. How wonderful. Not.

There are two problems here:
1) You have to pay taxes on the gain, without having the money to pay it with. This is usually more of an annoyance than a real problem, depending on how big the tax bill is.
2) The really stinky problem is that when you eventually sell the security, you have to figure out when each piece was purchased, how much you paid and how much you made/lost. Your original investment is not too difficult, but if you have held this thing for years, you have to track down every stinking reinvestment and compute the basis, the length of time held, and the gain/loss. A real pain in the neck. Of course, you could have someone else do your taxes, but they are still going to have to go through this business and it will take them time, time you are paying for at some astronomical rate.

More advice: don't go to the economy tax people. I made that mistake once in Phoenix and found out a few years later that I should have gone to their "executive" service. The corner store was not equipped to deal with me and my money. Now I pay a real accounting firm real money to do my taxes. The pain I suffer when I write them a check is minuscule compared to the pain I used to suffer trying to do my own taxes.

Some people enjoy this kind of work. I cannot stand it. I have even hired a bookkeeper to deal with my monthly household bills.

I came across this story about buying a house:

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