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Capital gains taxes don’t just steal your wealth, they change the way you make bets

If you have a 70% chance of doubling your money or losing everything, a full Kelly bet is 40% of your portfolio

But if you are taxed 50% on your winnings, your true upside if win is only +50%, not a double (+100%). Based on these odds, you’d only bet 10% of your portfolio for what is otherwise the exact same bet

And if your taxes are 60%, you shouldn’t take the bet at all

This is such an important concept to understand

1) for yourself so you size correctly

2) so you understand how damaging raising taxes is to entrepreneurs and funding investments that have the chance to make the world a better place.

Source: https://twitter.com/tbr90/status/1733202123100201173

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Discussion

Hazey 2y ago

Yup

armstrys 2y ago

Do inflation next… I’m actually curious. I’ve always heard inflation framed as a tax, but it seems like it would produce the opposite (and still suboptimal) incentives?

Juraj 2y ago

Inflation is tax on two layers. It makes you lose your purchasing power because of rising prices. It is like 5% p.a. Inflation taxed all your static fiat wealth 5%. It's more complicated, because the average number is not how prices of goods and services you buy change, it's just some bureaucrat's calculation based on what they think people buy.

Then there's another tax on top. Imagine you invested 1 million usd in a business and made 1.2 million usd at the end of the year. You are taxing income of 200k. But that is not income in real terms, because in order to buy something that was worth 1 million you would need 50k more if inflation is 5% (it isn't, but for illustration). So you are taxed on the incompetence of the central bank to keep the value of money.

LpLiberto 2y ago

Inflation is a tax on savings, which pushes us to seek capital gains to *keep* what we have earned, our purchasing power. And then they tax that… it is pure evil.

And then they want to tax unrealised gains, which would push us to disregard long-term approaches, increasing our risk of loss to seek a tiny gain in the short term.

We are slaves, the reality is that we don’t work for ourselves but for the State. We don’t work for ourselves because we don’t get to maintain the purchasing power we earn through work.

atyh 2y ago

summary.

taxation is theft.

ede3d957... 2y ago

Monero businesses will take over the risk takers/builders.

InBoston 2y ago

Interesting. Are you able to elaborate for my understanding . Just thinking out loud. If you make a gain you pay tax of let’s say 30% but if you lose you could write it off against gain of another bet of similar type.

Let’s assume it’s 50% tax, so I get your net gain will be 50% when investment gain is 100%. But how would it change your risk tolerance if investment in all you asset classes will be taxed at 50%?

Juraj 2y ago

In many countries you can't write off a loss on one asset against gain in another.

InBoston 2y ago

Got it.