Image source: The Motley Fool
Warren Buffett spent 2024 dropping one of his biggest investments Berkshire Hathaway (NYSE:BRK.B) stock portfolio. The main reason is capital gains tax.
As I keep my investments in a Stocks and Shares ISA, I don’t have to worry about this. That’s why I’m looking to stay invested, rather than following the Oracle of Omaha.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Investment benefits
In the first half of 2024, Berkshire sold 505,560,000 shares an apple – more than half of its pole. And the tax consequences of this are huge.
At this time, the stock is trading between $165 and $216 per share. So in the middle of that range, Buffett might have been trading at an average price of $191.
According to analysts, Berkshire’s cost basis for Apple shares is approximately $35 per share. If that’s the case, the company saw a profit of around $79bn.
Or at least, it would have made that profit exempt from capital gains tax. And that’s where things get interesting.
Capital gains taxes
In the US, the corporate capital gains tax is 21%. That means Berkshire will have paid about $16.5bn of its profits to the government.
Buffett said at the annual meeting that this is an unusually low rate and is likely to increase. Two months later, the Biden administration proposed increasing this to 28% by 2025.
A change of government means this will not happen. But if that were the case, Berkshire’s tax would rise to $22.1bn on a similar basis.
In other words, Buffett’s decision to sell during the first half of the year may have saved Berkshire $6bn in taxes. That is an important result.
Coca-Cola
These kinds of tax considerations also explain why Buffett hasn’t been selling stocks Coca-Cola. In 1994, Berkshire completed its buyback of 400,000 shares for $1.3bn.
Today, that stake is worth $25.5bn, which translates to $24.2bn in pre-tax profits. But that will be reduced to $19.1bn after tax.
Berkshire receives about $776m a year in dividends. To do better than that at $19.1bn, the company would need to find a stock with a yield above 4% with better growth prospects.
That may not happen, which means Buffett selling Coca-Cola shares doesn’t make the same sense as he does Apple. In Coke’s case, Berkshire stands to do better by collecting dividends.
Why don’t I have this problem
Buffett’s problem of making 450% on investments is a good thing to have. But if I ever find myself in this situation, I won’t have to look at what the future tax rates will be.
Holding my investments in a Stocks and Dividends ISA means they are not eligible for capital gains tax. So I will be able to hold on to them without worrying about losing profits due to taxes.
Source link
