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As we saw from the recent AI infrastructure stock run-up and subsequent crash of 35-45%, the mindset of not wanting to pay capital gains taxes can cause people to get locked in completely to sunk-cost fallacy and bargaining with the market.
Many people who bought the AI bubble early and held (unless you were buying semiconductor and memory stocks, in size, so early that the thesis was not yet clear on why those companies will be critical to AI infrastructure, which is its own seperate kind of capital allocation mistake) have now lost a significant amount of their profits or broke even, and those who bought during the run up, the top, or one of the several "dips" over the past 4 weeks are at an unrealized loss.
If you look around Reddit there are also many examples of those who bought Apple, Nvidia, Amazon, etc. decades ago and are unwilling to realize their $1-5 million paper gains because it would trigger a capital gains tax of $250,000 to $1,125,000.
In their view, making $750,000 is unacceptable if it means paying $250,000 in taxes, so they choose instead to assume that past performance equals future results. They assume that the market is obligated to reward them for holding for 20 more years by allowing them to make $7,500,000 and pay $2,500,000 in taxes instead. If that person thinks $250,000 in taxes is unacceptable because it's a big number, would they be willing to pay $2,500,000 in taxes? Why not ride those shares of Amazon or Google up to $100,000,000, when you'll have to pay $25,000,000 in taxes on your capital gain instead?
If stocks actually worked this way, there would be no reason for Wall Street to ever sell you shares of stock. The trillion dollar firm making tens of millions of dollars a day on spread arbitrage is timing the market, and everyone knows time in the market beats timing the market, right? Every time you buy a share of stock, the party on the other side is valuing some rapidly hyperinflating, cash-dragging petrodollars more than the infinitely compounding prime asset they just sold to you. Why would they do that when they can just hold the stock themselves and get continuous, compounding, inflation-beating performance?
It's pretty sad to see people who had millions of dollars in paper gains buying the AI bubble that assumed past performance would continue and therefore they should wait until 1 year has passed from their full port into AI infrastructure and neoclouds to sell for the more advantageous long term capital gains tax savings. Many of them are now dependent on these companies gaining 250-300% in marketcap, hundreds of billions of dollars, in an incredibly volatile and interest rate-disadvantaged market just to get back to where they were, at which point they'll likely be blinded by the paper gain again and refuse to pay the capital gains tax again.
It's good to remember that the market does not owe you performance of a stock or that your stock be valued with the same metrics as similar companies are, or that the stock price of a company matches the importance of that company in the industry you think will outperform. The market does not owe you compounding growth, nor does it owe you a return to a previous all-time high. The highest expected value move on a position that's wildly profitable and starting to stall in momentum or reverse is often to liquidate it and accept that you will pay some taxes on it. If your 80% profit turns into a 30% profit and you liquidate it then, you'll still pay taxes on it, you'll just have made less money. Taxes should never be a justification for avoiding converting paper wealth into real wealth.