How I learned to stop worrying and love the capital gains tax

MYSTERY POST: It should probably be called old people tax instead

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If you own “capital” there are two ways to earn from it.

1. The price of the capital goes up.

2. The capital spits out money and some of it lands in your pocket.

Capital, the way I’m using it, could be a company’s stock or a piece of real estate or a bond or whatever. You could buy a stock (or real estate) and its price could go up. That would be capital gain. Or your stock could issue dividends or real estate could earn you rent, which is your capital spitting out money into your pocket.

Capital is a slow, boring process. Usually it takes years to get a higher price for your capital. But, over time, the expectation is that when your capital gain pays off, it pays off big.

When you make a profit from selling your stock or piece of real estate, you pay a capital gains tax. This is different from the money you would make any other way. If the same stock or real estate spits out money, or if you work a job or run a business and make some money that way, you pay your regular income tax.

I’m not entirely sure why, but capital gains have always always been taxed favourably in comparison to most other incomes.¹ If you make money the slow, long, big way, the government is okay with you paying less tax than you would if you made money faster but in smaller chunks.

As someone whose money is almost entirely invested in stocks (via mutual funds, for the most part) I have had a strong opinion about how capital gains on equity should be taxed. I did not like that it existed!

For 14 years, right until 2018—conveniently just before the year I actually started earning an income—long term capital gains on equity were tax free. If you bought a stock, held it for one year and one day, and, say, happened to even triple your money, you would pay no tax on all of that sweet profit.

Of course, that was then. Now, the government is slowly moving to tax long term capital gains closer to regular income. It was 0% once upon a time, then it became 10%, and it’s now at 12.5%. (In comparison, tax on regular income goes up to 30%.)

For anyone who invests in stocks directly or indirectly, like myself and I’m guessing most readers of Boring Money, this is not going to make them happy. If you’ve invested over a long period, you’ve paid with your time and patience, and you deserve to be rewarded with more money and less tax.

I’m sympathetic to this idea. In fact, I agreed with it entirely until…