The Hidden Tax Trap That Could Destroy Your Wealth Overnight

Kamala Harris’s Shocking Tax Move

Source: CNBC

Let's talk about one of the greatest dangers in the stock market: taxation. Yes, you heard me right, taxation.

You can keep analyzing companies, but if you don't have basic knowledge of taxation, you'll never gain the financial intelligence needed to become wealthy.

Kamala Harris knows how to hit the wealthy, which is why there's a measure she wants to introduce that could cause many high-net-worth individuals to leave the country in search of better conditions elsewhere.

What she wants to do is impose a tax on unrealized capital gains. This makes me think about how dangerous a politician can be when it comes to targeting the wealthy, and how quickly you can lose a lot of money (and freedom) if you don't know how to manage something as "simple" as taxation.

What's clear is that every country (or region) has its own rules, and we must abide by them. There's no point in evading taxes—trust me on this.

So, there are two possibilities: either you accept the rules and benefit from them, or you move to another country.

One of the laws that overnight caused many wealthy people to become poor was the 1986 Tax Reform Act.

The Tax Reform Act of 1986 in the U.S. simplified the tax code, reduced marginal tax rates for individuals and businesses, and eliminated numerous deductions and loopholes. Its goal was to make the tax system more equitable and efficient by broadening the tax base and reducing incentives for tax evasion.

As a result, people who benefited from certain rules could no longer take advantage of them. It’s a tough break, but it’s the reality we must accept.

Who were the most affected, as usual? Middle-class workers. Why? Because the tax loopholes they used were eliminated.

As those people worked harder to regain what they lost, the economy improved, their incomes increased, and their tax advisor began whispering the same old wisdom: "Buy a bigger house. The interest on your debt is your best tax deduction. And besides, your home is an asset and should be your biggest investment."

Basically, those who were working to have a better life, a nicer home, or a larger one closer to the coast, found themselves heavily penalized overnight. This way, the government ensured that they would spend more years working.

As a result, these people see the "easy monthly payments" and get trapped in a deeper debt cycle.

Let me remind you what happened next. The crash of '87 occurred, the largest one-day drop in the Dow Jones (over 20%), and then the world sank into a recession.

They may seem like small decisions, but they leave a lasting impact on people.

The economy changes, but history repeats itself. The curious thing about these kinds of changes is that they always hit the same group of people: the middle class. Politicians know that's where the most revenue can be collected. Many think it's the rich, but that's not true because the rich have the tools to move freely around the world.

I’m not saying that Kamala's decision will completely change the economic direction, I'm just saying we all have an obligation to stay informed about the tax changes in our own countries.

It may seem like taxing unrealized gains is a small change, but it's not. If the stock market has historically averaged 7%, this means taking about 2% off every year. If you add the fact that roughly 10% of all dollars in circulation are being printed year after year, you have a big problem as a saver.

One thing is clear: debt will never be taxed. Money is debt, and therefore governments can't tax themselves. As we've explained many times, this is a strategy that financially savvy individuals have used repeatedly. For example, Mark Zuckerberg, the creator of Facebook (Meta), bought his house with debt.

His house, valued at $10M (as an example, I don't know the exact amount), was paid for by pledging his Meta shares as collateral. If, instead, he had sold $10M worth of shares, he would have needed to sell $13-15M due to the capital gains taxes he would have had to pay.

I’d love it if, for just a month, you stopped analyzing whether Louis Vuitton sold more or fewer handbags and focused on studying what really matters.

Here, we'll be sharing small tips that will help our subscribers become a bit freer and more financially intelligent.

Now, as we do every Sunday, let's look at our portfolio.