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Capital gains tax is assessed in fiat currency units. So, through monetary debasement, your assets become more valuable in those units, irrespective of the real market value.

For example, suppose you buy a gold coin for $1000 and sell it later for $2000, over a period where the money supply doubled. You owe tax on the $1000 “gain”, even though some or all of that gain may be attributable to the intervening monetary debasement.

Had there been no debasement, your capital gain may very well have been less, zero, or even a capital loss, for which you’d have owed no tax. Capital gains tax, by being assessed in fiat currency units, and not adjusted for monetary debasement, punishes you for the government’s own money printing.

Tony Carrera 1y ago

I would agree with that. Basically no money printing = no inflation = no asset appreciation.

I guess I think about it differently as I’ve always tried to grow a business and think of it from that angle. From this perspective it’s an active growth vs a static asset (gold in your example) whose value is mainly derived from inflation fears.

I guess the equivalent in macro scale would be gdp. My productivity growth = business growth = capital gains

Does that make sense?

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Discussion

jimbocoin 🃏 1y ago

As I understand it, capital gains tax is applied just to the difference in price between acquisition and disposition of an asset. I picked gold for my example because it’s static, and the closest thing to neutral—compared to a business or even a productive asset like farmland.

If your business earns more money over time, I don’t think that’s a capital gain, strictly speaking, but rather profit. There are taxes on profit as well, but those are distinct from capital gains taxes, AFAIK.

I’m not an accountant nor lawyer, so this is just my lay interpretation, and I could be overturned by an expert in such matters.

Tony Carrera 1y ago

That’s a good point, business profit ≠ capital gains. The business profit, I would define as retained earnings or free cash flow (net income can be heavily manipulated), which should be deployed/reinvested to earn more retained earnings/FCF.

A good capital allocator will work to grow the business and reduce corporate taxes. I mistakingly mixed this up with capital gains tax, sorry about that.

I think the bottom line is monetary debasement = inflation = no bueno.

The cheat code is save in assets which beat your inflation rate (not CPI). With insurance, food, utilities, etc going up north of 10% year over year, only a few assets I can think of can help… care to take a guess? lol