Cashflow / Tax question

[KateMoloney]

Lets say you have a $500,000 trading portfolio and your EOY tax bill on that portfolio is $50,000 (no CGT discount because the trades are held for less than 12 months).

How do you pay the tax bill?

Do you pay the tax bill from external sources of income?

Or do you take the tax from the trading account and rebalance your trades?

If you do the later, do you try and time the tax payment for a suitable time (eg when portfolio reaches new equity high – or when you are rotating your trades if your system is medium/long term)

Just trying to think ahead for next FY

[Nick Radge]

It will depend on whether or not the entity has excess funds to pay the tax bill.

If the entity does, then I leave the funds in the trading account and pay the bill externally.

But that may not be possible.

[RobertMontgomery]

Currently, I pay out of my external income to continue and grow the trading account until it is big enough the external income is no longer needed.

If paying taxes and expenses out of my trading gains, I would have a low risk, low vol bucket/strategy for paying taxes and living expenses, etc. that would be replenished as needed and new highs are made.

[KateMoloney]

Thanks Nick.

We have an external source of income that we save on a monthly basis.

I was thinking we could set aside a % of that into our tax savings account. Let the trading accounts grow.

[KateMoloney]

Thank you for sharing Rob – smart move.

[TerryDunne]

Hi Nick,

Assuming it’s not possible…

How do you recommend reducing allocations?

One could:

1. take equal amounts from each system,
2. take pro rata from each system based on profit contributed,
3. take as much as possible from the worst performing systems (sub choice, that could mean closing the worst performer(s))
4. something else???

Thanks for the question Kate, I reckon it’s an important one.

Regards,

Terry

[KateMoloney]

Thanks Terry.

I think its wise to take the funds out on an annual basis (if you didn’t have other cashflow to pay the tax from). That way you get the benefit of compounding.

If you have good accounting systems, you should know what your tax bill is by July each year. You may not lodge your tax returns till say Oct-Dec. So that gives you a couple of months to plan (perhaps when rotating in & out of trades is the best time to take the tax out of the account).

Psychologically speaking, I don’t like the idea of reducing trading accounts, so for now we are setting aside a % of our incomes to pay future tax bills.

[TerryDunne]

Hi Kate,

I agree with everything you posted.

And…assuming things go as we would all hope, at some point a situation will arise where funds do need to be removed from a trading account (e.g. a very profitable trading year giving rise to a large tax bill).

I wonder whether the lack of response is because people don’t really have a methodology/strategy/philosophy?

I’m unclear on the best approach, but I’m really clear that this could be a very non-trivial decision.

I hope more people will share their thoughts, even if they aren’t yet facing this issue.

[JulianCohen]

I didn’t want to respond as I live in Singapore and thankfully that means I don’t pay tax on my trading profits.

My sympathies to you though Terry

[TerryDunne]

[TerryDunne]

So, specific to my situation. I put all of my available funds into my trading account. Luckily, I started at a good time so I will need to reduce my funds by approximately 20% to pay my tax bill.

At this stage I think I’m going to close my 2 worst performing systems. They are the worst performing not just in real life but also in back testing, so it feels like it make sense.

I’ll be giving up the benefits of some diversification for the extra performance…even as I type this I’m not convinced.

[KateMoloney]

Great problem to have !

[danielbarbaro79]

Hope this makes sense,. .bit long winded
This is what I do ,
1/I try to pay Tax out of own pocket – it’s not always achievable & gets harder as account grows
2/ like you’re doing keep some surplus funds in MISA or high interest account for this type of event – so don’t have to draw down from your account at an inconvenient time i.e. in drawdown
3/ It’s not for everyone , but I often hold a small of my portfolio in CDF’s with IB , its cheap interest, same brokerage as stocks and at 20% security deposit you have 100% stock exposure – and can free up cash free to pay a bill and rebalance at a time that suits you – you just have to watch & understand the leverage effect

I hate taking out cash in a DD and avoid at all costs – if in DD situation I use my home loan offset if I am forced to find cash ,

Then paying down the “Borrowed money” if you do it that way ,
1 generally just shave profits off down the track when closing positions in a profit situation (not losses) -or doing a monthly rotation
I prefer to keep the compounding for as long as possible

Otherwise not using debit to cover tax bill – if your making profit you can semi forecast your tax liability , ie 30% bracket , example – win loss rate 50/50 possible put aside 20% or so of profit margin off successful trades & keep aside for tax

The other way that works till it backfires , is stream the income to your partner and let them pay the Tax – I did get in quite a lot of trouble for this once my wife worked out why her Tax return stopped and she got Tax bills then PAYG notices. !!! she saw the funny side eventually & doesn’t freak as much.

when the personal or company Tax factor is considered , its a good time to do a comparison of what could happen trading a SMAF at the concessional rate for 20 years

[TerryDunne]

Still, a problem

[TerryDunne]

Thanks Daniel. It’s an interesting area. Maybe I should move to Singapore

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