This is exactly what Interactive Brokers offers today, wherein they issue you a debit card backed by the cash value in your account, and once that's exhausted, by the margin available. Instead of selling securities to pay for your purchases, you can borrow against them (to within your personal risk tolerance) at a tax-deductible rate of 3.05% for the first 100K and 2.55% for the next 900K.
Ehhhh be careful. Margin interest in the US is tax deductible only to the extent that you used the margin loan to buy investment assets. If you use margin to buy a share of Starbucks, great. If you use it to buy a coffee, you’re out of luck.
Conceptually, however, if you were to sell a share of Starbucks, use the proceeds to buy a coffee, and then borrow against your margin to restore your position, then just borrowing against margin to buy coffee is net-net the same thing. It would even result in a wash-sale.
Fidelity also offers this in a "Cash Management Account" which you can tie to a brokerage account. It's possible to maintain a $0 balance in the cash account and use margin or some funds (generally money market) to cover each debit. Works great. I wouldn't be interested in a system that automatically sold equities from a taxable account; too volatile and too likely to cause a tax nightmare.
Sign me up. I want to be paid in stock so I can avoid income tax thereby paying less than my share in taxes like many overly wealth families in the United States
If you're using stocks to back your debit card purchases then you would be realizing gains incredibly frequently and therefore likely subjected to short term capital gains, which are taxed at normal income tax rates. You would not see a benefit in taxes in this scenario.
I'm pretty sure if you get compensated in stock, you still have to get taxed at the time of compensation (as income equal to the stock's initial value)
Long-term investing in stocks is a well-known way to get rich.
If median income people will keep all their money in stocks, then things may change quite drastically. I am wondering if this would have any power to affect the inequality gap.
As the author mentions, there is some similarity to crypto. For instance, one could use crypto to pay for things but it is infeasible in practice because in the US you would have to pay taxes on every buy trade.
Of course, I am not talking about WSB like "investing".
Long-term investments is basically 8% per year when holding long-term (e.g., more than 10 years). In other words, your capital doubles every 10 years. Inflation is slower than that.
The common estimate is 7% averaged over 10 years with a lazy portfolio. You can do better than 4% even if you do a long term target-date fund like Vanguard's 20XX retirement funds since the fees are so low.
If you bought long term government bonds in the early 80s at double digit interest rates, your returns over the next 30 years were very comparable to stocks.
Is it safe to assume that stocks over the next 30 years will return more than the 2-and-a-little % of 30 year government bonds right now?
You are being downvoted for some unknown reason. 8% is a high estimate and people simply averaging the past and coming up with that number as a reasonable predictor of the future are the ones slamming the downvote button in hopes that you are wrong.
1989-2019 with dividends reinvested and inflation controlled show a return of 7.3% in the S&P 500 index. But 1959-1989 with the same parameters shows a return of 4.96% by just moving the time period back 30 years.
Arbitrary endpoints can make you justify anything, including double digit returns. But people who are saving money in the equities market that gets ever more crowded with index funds and ever more efficient should probably not count on 7-8% returns as the canonical amount they're getting back. They should plan on 5% or lower and be happy with higher returns if they come.
7-8% is not an arbitrary number and the reason why 1959-1989 is different is because the % of money printed was different in that period. Currently, we are doubling money supply every 10 years, therefore one should ok to expect 2x in stocks because there is no other significant place for money to go to.
In the 70s and early 80s inflation sent stocks to depths that people today can't even imagine. They joked about American industry being worth more dead than alive.
The P/E ratio of the S&P 500 got into the 7s!
So why does historical experience show that inflation is so bad for stocks, if it seems logically to you to be good?
I kind of think I read something that compared long term treasuries from the early 80s and stocks and found that the treasuries returned just as much since then.
It seems possible that is the way in which the future will resemble the past.
30 year treasuries currently yield 2.35%, so it seems to me going out on a limb to assume that efficient markets allow for stocks to be significantly better.
The rate for long term treasuries in the very early 80s was right in the double-digit or near double digit range that people now feel entitled to for stocks. With bonds, you can't deceive yourself as easily about the possible future. So doesn't that constrain stocks?
...and if market returns over the next 30 years are going to be 2.35%, and you get to pay taxes and then have even minimal inflation, then it looks kind of irrational to take any risk at all, unless you basically have the same psychology of a lottery player.
But buying diversely and holding is a time-honored way of building money. Not at dotcom-boom rates, but at faster-than-inflation rates. On the order of 7%, enough to double your money every decade -- and you want to hold for at least that long if you expect to weather the ups and downs.
That's not really enough to make you rich unless you're already rich, but it's enough to take a comfortable salary and turn it into a comfortable retirement. If you're on a minimum-wage, hand-to-mouth [or less] salary, yeah, you're still boned, and investing in the market isn't an option when you need every dollar available right now.
> If median income people will keep all their money in stocks
Median income people can't keep all their money in stocks consistently. At that level of income, they frequently need to draw against their savings (or more commonly can never allocate it all consistently into the market in the first place). That's a critical separation point between being at the median and being in the upper economic tiers: the need (or lack thereof) to tap your capital for major life expenses.
At a median income, step one is to have a cash buffer for emergencies. Just accumulating $5,000 in stray cash in your bank account as a life buffer is often difficult at a median income. Some emergency always wants to deplete it or otherwise move it backwards.
The reason median income persons can accumulate wealth in a house is because they require shelter. That ownership is often an expensive form of shelter and a mediocre form of investing (with a typical house property taxes will often wipe out between 1/2 and all of your home's value gain over time, if you're lucky enough to have any real value gain at all; throw in maintenance costs; then mortgage interest costs will smash another large share of your gains from actually paying down the mortgage; it's inevitably like burning a dollar but saving one corner of it and pretending it's a great form of wealth formation), however since they do require shelter regardless, it ends up acting as a very slow building form of wealth formation (via home equity).
You're at the median income. You've been careful and have accumulated $100,000 in the market. You require $50,000 of that for education expenses for your 15 year old child (you've known that all along and have expected to task a portion of that capital to that expense). 2008-2009 happens, the market tanks, it's the end of the world (according to the headlines). After the decline now you have $60k in the market and it's the year 2010. What do you do: pray it doesn't decline further or pull the capital and safeguard the required $50k? How confident are you vs your situation, circa 2010, that things are going to be ok with the market?
It's a simple example, however it perfectly illustrates why median income persons struggle to do what you're proposing. And that's a very conservative scenario that doesn't get into the countless other life emergencies that will come for you over eg 20 years of trying to build a consequential portfolio at a median income. It's not impossible, it's very difficult.
My point is that (and as you also said) investing is something for upper-income people. However, once median-income people see that all their money are in stocks (even if it is 5k), it may change their attitude. This would be a light form of what people call HODL in crypto. The difference, of course, is that in crypto people expect at least 10x in 10 years while in stocks one should expect not money than 2x. However, if applied broadly, one might expect that even median-income stocks-HODLers will tend to spend less on unnecessary things.
I'm convinced the whole point of capital gains tax is to give the government an advantage when borrowing since government bonds are tax free. The government bond market is trillions, so this is not small potatos.
Aren't stocks worth more than their instantaneous value? I.E. I expect the value of stock A to grow at a better rate over time than stock B. If this type of thing ever comes about, I'd be very interested in how to control what is sold to cover a transaction.
In theory, the price of the stock should account for the future free cash flows of the underlying company, so the growth should be priced in.
Any future growth at the end of the day is speculation.
> Aren't stocks worth more than their instantaneous value? I expect the value of stock A to grow at a better rate over time than stock B.
Well, in theory stocks are valued based on their projected future performance. See also the efficient market hypothesis. Even if not true, there's no reason to think someone selling shares to cover purchases would have any insights on how to outperform.
Not really. The instantaneous value of a stock is established by buyers and sellers, both of whom are pricing in expected future performance.
Maybe what you're getting at is that in this case the seller has no opportunity to set an asking price, and is simply accepting the current market value? If this really took off that would be an issue, but I can't see why this would take off.
This already happens. Interactive Brokers, for instance, will issue you a debit card that charges against your margin account. You can choose to cover the margin later by closing positions, or use it like a credit card and pay interest on the margin balance.
So, now instead of paying 5% sales tax on your Starbuck purchase you can also pay 15% capital gains tax for realized gains.
If you're going to pay it anyway it won't matter but it would really stink to pay $1,000 worth of stock on a shopping spree, plus $150 capital gains tax and then that stock drop 25% in value the following month.
I thought you said capital gains was "for realized gains"? In which case $1000 of stock can't have $1000 of realized gains unless you paid $0 for it initially.. in which case, I'd say the resulting $150 tax bill falls into the category of "good problems to have".
Edit: unless perhaps you're assuming that the $1000 you spent is considered to have come entirely from realized gains on what is actually a much larger position? If so then I can see your point.
* Reporting sales of securities on your tax return is tedious. Reporting fractional shares and wash sales (which are likely with the proposed scheme) is even more tedious.
* Credit cards exist. If you're wealthy enough to have taxable investments, your credit is probably good enough for credit card rewards.
* From a behavioral finance standpoint, mixing long-term investments and short-term spending is probably not a good idea.
Absolutely. Also, isn't part of the point of investing to defer your taxable positions until a later point when you hope to have a lower rate. This idea seems silly and I don't think that is what Robinhood is planning. They just want to be the investment brand of default in 20 years and they are doing whatever they can to get young people hooked now including letting them buy 0.1% of a single share of Facebook.
> Credit cards exist. If you're wealthy enough to have taxable investments, your credit is probably good enough for credit card rewards.
Replicating this would involve having little to no cash, spending on a card, and then liquidating investments to pay off the debt. Which is similar to how most wealthy persons manage their consumption.
Of course, this requires having access to credit, assets, and money transfer services. Broadening access to that isn't necessarily a bad idea.
I mean, unless you're at the absolute bottom end of society or you are terrible with money, you can get a credit card and pay it off monthly. There are poor people who are responsible with money. My fiancées parents are low-wage Mexican immigrants -- they have debit cards and only spend money that they have.
But poor people don't need those kinds of micro optimizations that will save them pennies a week (do you need an extra 1% interest in the $14 in your checking account?). There is way, way more low hanging fruit than that.
> Which is similar to how most wealthy persons manage their consumption.
That's not really true. Wealthy people know not to lose their principal. They do this by borrowing either unsecured or on margin against their assets, the using dividends and interest to pay off their spending leaving the assets themselves untouched. Doing this in a way that leads to increased net worth requires a cushion.
> If you're wealthy enough to have taxable investments
With the new world of zero commissions and fractional shares available (soon?), the minimum wealth required to buy stocks isn't very much. I still don't think this makes very much sense, though. If you can get credit, buying now and settling in a month would mean you have time to manage a more strategic sale. If you don't have access to credit, presumably because of lack of wealth, volatility is going to kill you --- you'd be much better served with a (low) interest checking account.
The point of this proposal is clearly not to help the hoi polloi, but to add some billions to the market so investors can squeeze in a few more points from the unproductive cash sitting in checking accounts. Airbnb, except the hotel rooms are checking accounts and the tourists are billionaires.
Nah, the point of this is so rich, nerdy software engineers who have a lot of money but aren't interested in buying status symbols can feel warm and fuzzy about their financial hyper-optimization.
> maybe some sort of hidden cost that makes it too expensive
TLDR: Don't confuse investments with pocket money. The reason why there is some friction to selling stock is because the owner and buyer need to decide what the value of that stock is. A point-of-sale transaction is a poor place to determine the value of a stock.
(Long answer)
Because then the question is, who are they selling the stock to?
Many years ago, I interviewed with a company that described an elaborate scheme to reduce the cost of trading stock. Basically, if you're a website where people manage their stock portfolio, you can save on transaction fees by keeping as many trades as possible among your users. As far as the stock market is concerned, no sale occurred.
In this case, the only way to make it work is if the credit card has a whole bunch of buyers lined up for all of the various stocks that are sold whenever the card is used; AND is willing to float about 0.753782 shares of Tesla. This way they can let you sell 0.0001 share to pay for your stick of gum without them incurring the transaction cost of a share trade.
The problem is that, when you invest in something, you need to actively decide when to buy, hold, and sell. If you had such a system, you would need to tell it that you want to sell your Tesla when you buy coffee, but hold your Apple. (Otherwise, you'd want to back it by a mutual or index fund, or ETF.)
Or, another way to do it would be to have a card for each of your investments, and you actively choose which card you use at the point of sale.
(IMO, it's easier just to sell an investment when you pay your credit card bill.)
Here's a free fintech idea - a credit card that instead of 1-2% cashback, buys you 1-2% of your purchase's stock, i.e. a $5 Starbucks coffee gets you $0.10 worth of $SBUX stock. I'm really curious how a widespread use of this would influence stock prices.
That is a neat idea, and it's something that companies would absolutely get on board with and offer rates higher than 1-2%, especially if there were a minimum investing period of a year.
This article was clearly written by someone that has not been investing long enough to encounter a bear market.
"Why do people prefer to pay for things using stable instruments rather than volatile ones like Tesla shares? My guess is that it has something to do with FOMO."
Or maybe it's a terrible idea to have people paying for their groceries and rent with assets that have the possibility of tanking 50% in a matter of weeks. If this feature would have existed in 2008 there would surely be regulation in place to prevent it today.
> This article was clearly written by someone that has not been investing long enough to encounter a bear market.
This, so obvious. Most people actually want to keep some fraction of their wealth in safe, liquid assets, it's just the sensible thing to do. So it's not clear to me what they would gain by getting rid of their ordinary checking accounts. Cash is king anyway.
"a debit card purchase can only proceed if there are uninvested cash balances in the linked-to account"
Or, bear with me, what if there was a credit line secured by the stocks in the account? Then you wouldn't have to sell anything! But to market it, you'd have to give it a catchy name. Something...edgy, but unfortunately, there's already something called "Merrill Edge" so, I dunno.
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[ 3.0 ms ] story [ 116 ms ] threadEhhhh be careful. Margin interest in the US is tax deductible only to the extent that you used the margin loan to buy investment assets. If you use margin to buy a share of Starbucks, great. If you use it to buy a coffee, you’re out of luck.
https://en.m.wikipedia.org/wiki/Alternative_minimum_tax
I'm paid partially in stock, still pay normal income tax of the value of the stock the day it's granted
If median income people will keep all their money in stocks, then things may change quite drastically. I am wondering if this would have any power to affect the inequality gap.
As the author mentions, there is some similarity to crypto. For instance, one could use crypto to pay for things but it is infeasible in practice because in the US you would have to pay taxes on every buy trade.
For one, we'd expect average returns to go down. The flip side of that is corporate financing gets cheaper, which could spur new capital formation.
Really? Buying high and selling low is a time-honored way of losing money.
If you plan to hold for less than 10 years, then things are much more uncertain in both directions.
Is it safe to assume that stocks over the next 30 years will return more than the 2-and-a-little % of 30 year government bonds right now?
1989-2019 with dividends reinvested and inflation controlled show a return of 7.3% in the S&P 500 index. But 1959-1989 with the same parameters shows a return of 4.96% by just moving the time period back 30 years.
Arbitrary endpoints can make you justify anything, including double digit returns. But people who are saving money in the equities market that gets ever more crowded with index funds and ever more efficient should probably not count on 7-8% returns as the canonical amount they're getting back. They should plan on 5% or lower and be happy with higher returns if they come.
The P/E ratio of the S&P 500 got into the 7s!
So why does historical experience show that inflation is so bad for stocks, if it seems logically to you to be good?
It seems possible that is the way in which the future will resemble the past.
30 year treasuries currently yield 2.35%, so it seems to me going out on a limb to assume that efficient markets allow for stocks to be significantly better.
The rate for long term treasuries in the very early 80s was right in the double-digit or near double digit range that people now feel entitled to for stocks. With bonds, you can't deceive yourself as easily about the possible future. So doesn't that constrain stocks?
https://www.macrotrends.net/2521/30-year-treasury-bond-rate-...
...and if market returns over the next 30 years are going to be 2.35%, and you get to pay taxes and then have even minimal inflation, then it looks kind of irrational to take any risk at all, unless you basically have the same psychology of a lottery player.
That's not really enough to make you rich unless you're already rich, but it's enough to take a comfortable salary and turn it into a comfortable retirement. If you're on a minimum-wage, hand-to-mouth [or less] salary, yeah, you're still boned, and investing in the market isn't an option when you need every dollar available right now.
Median income people can't keep all their money in stocks consistently. At that level of income, they frequently need to draw against their savings (or more commonly can never allocate it all consistently into the market in the first place). That's a critical separation point between being at the median and being in the upper economic tiers: the need (or lack thereof) to tap your capital for major life expenses.
At a median income, step one is to have a cash buffer for emergencies. Just accumulating $5,000 in stray cash in your bank account as a life buffer is often difficult at a median income. Some emergency always wants to deplete it or otherwise move it backwards.
The reason median income persons can accumulate wealth in a house is because they require shelter. That ownership is often an expensive form of shelter and a mediocre form of investing (with a typical house property taxes will often wipe out between 1/2 and all of your home's value gain over time, if you're lucky enough to have any real value gain at all; throw in maintenance costs; then mortgage interest costs will smash another large share of your gains from actually paying down the mortgage; it's inevitably like burning a dollar but saving one corner of it and pretending it's a great form of wealth formation), however since they do require shelter regardless, it ends up acting as a very slow building form of wealth formation (via home equity).
You're at the median income. You've been careful and have accumulated $100,000 in the market. You require $50,000 of that for education expenses for your 15 year old child (you've known that all along and have expected to task a portion of that capital to that expense). 2008-2009 happens, the market tanks, it's the end of the world (according to the headlines). After the decline now you have $60k in the market and it's the year 2010. What do you do: pray it doesn't decline further or pull the capital and safeguard the required $50k? How confident are you vs your situation, circa 2010, that things are going to be ok with the market?
It's a simple example, however it perfectly illustrates why median income persons struggle to do what you're proposing. And that's a very conservative scenario that doesn't get into the countless other life emergencies that will come for you over eg 20 years of trying to build a consequential portfolio at a median income. It's not impossible, it's very difficult.
Well, in theory stocks are valued based on their projected future performance. See also the efficient market hypothesis. Even if not true, there's no reason to think someone selling shares to cover purchases would have any insights on how to outperform.
Maybe what you're getting at is that in this case the seller has no opportunity to set an asking price, and is simply accepting the current market value? If this really took off that would be an issue, but I can't see why this would take off.
If you're going to pay it anyway it won't matter but it would really stink to pay $1,000 worth of stock on a shopping spree, plus $150 capital gains tax and then that stock drop 25% in value the following month.
Edit: unless perhaps you're assuming that the $1000 you spent is considered to have come entirely from realized gains on what is actually a much larger position? If so then I can see your point.
* Credit cards exist. If you're wealthy enough to have taxable investments, your credit is probably good enough for credit card rewards.
* From a behavioral finance standpoint, mixing long-term investments and short-term spending is probably not a good idea.
Replicating this would involve having little to no cash, spending on a card, and then liquidating investments to pay off the debt. Which is similar to how most wealthy persons manage their consumption.
Of course, this requires having access to credit, assets, and money transfer services. Broadening access to that isn't necessarily a bad idea.
But poor people don't need those kinds of micro optimizations that will save them pennies a week (do you need an extra 1% interest in the $14 in your checking account?). There is way, way more low hanging fruit than that.
That's not really true. Wealthy people know not to lose their principal. They do this by borrowing either unsecured or on margin against their assets, the using dividends and interest to pay off their spending leaving the assets themselves untouched. Doing this in a way that leads to increased net worth requires a cushion.
With the new world of zero commissions and fractional shares available (soon?), the minimum wealth required to buy stocks isn't very much. I still don't think this makes very much sense, though. If you can get credit, buying now and settling in a month would mean you have time to manage a more strategic sale. If you don't have access to credit, presumably because of lack of wealth, volatility is going to kill you --- you'd be much better served with a (low) interest checking account.
TLDR: Don't confuse investments with pocket money. The reason why there is some friction to selling stock is because the owner and buyer need to decide what the value of that stock is. A point-of-sale transaction is a poor place to determine the value of a stock.
(Long answer)
Because then the question is, who are they selling the stock to?
Many years ago, I interviewed with a company that described an elaborate scheme to reduce the cost of trading stock. Basically, if you're a website where people manage their stock portfolio, you can save on transaction fees by keeping as many trades as possible among your users. As far as the stock market is concerned, no sale occurred.
In this case, the only way to make it work is if the credit card has a whole bunch of buyers lined up for all of the various stocks that are sold whenever the card is used; AND is willing to float about 0.753782 shares of Tesla. This way they can let you sell 0.0001 share to pay for your stick of gum without them incurring the transaction cost of a share trade.
The problem is that, when you invest in something, you need to actively decide when to buy, hold, and sell. If you had such a system, you would need to tell it that you want to sell your Tesla when you buy coffee, but hold your Apple. (Otherwise, you'd want to back it by a mutual or index fund, or ETF.)
Or, another way to do it would be to have a card for each of your investments, and you actively choose which card you use at the point of sale.
(IMO, it's easier just to sell an investment when you pay your credit card bill.)
"Why do people prefer to pay for things using stable instruments rather than volatile ones like Tesla shares? My guess is that it has something to do with FOMO."
Or maybe it's a terrible idea to have people paying for their groceries and rent with assets that have the possibility of tanking 50% in a matter of weeks. If this feature would have existed in 2008 there would surely be regulation in place to prevent it today.
This, so obvious. Most people actually want to keep some fraction of their wealth in safe, liquid assets, it's just the sensible thing to do. So it's not clear to me what they would gain by getting rid of their ordinary checking accounts. Cash is king anyway.
Or, bear with me, what if there was a credit line secured by the stocks in the account? Then you wouldn't have to sell anything! But to market it, you'd have to give it a catchy name. Something...edgy, but unfortunately, there's already something called "Merrill Edge" so, I dunno.