Lisa Sizemore, a taxpayer in the 10 percent tax bracket, purchased stock as an i

Question

Lisa Sizemore, a taxpayer in the 10 percent tax bracket, purchased stock as an investment on July 11, 2015. She sold the stock on July 9, 2016, 3 days before qualifying for the long-term holding period. If Lisa had waited until July 12, 2016 to sell the stock, she would have qualified for the 0 percent capital gains tax rate. Instead, the sale will now be taxed at ordinary income rates. Upon realizing this, Lisa has told you that she will “fudge” the sale date to July 12. She says to you, “What’s the big deal? It’s just 3 days.” What would you say to Lisa?

Explanation / Answer

Lisa Sizemore, has made a sale just three days before the completion of one financial year, missing out the completion cycle date by just three days, which would have helped her save the tax, she is now liable to pay, i.e., 10%.

Fudging or manipulating is unethical, should be avoided, something that cant be recommended. Any kind of manipulation in stock market invites legal action by the state law, and is strictly punishable. So on such grounds, no one would recommend Lisa to go ahead with her manipulative idea. The first line of advice to Lisa would be to forget any such idea of fudging or manipulating with anything in the capital market, even a small manipulation could invite her trouble from both Income Tax department and SEC as well.

Consequences of such manipulation:

1. Stock market moves in any direction, depending on the economic circumstances and investor behaviour. A stock may move upwards or downwards to a great extent every day, if she is planning to fudge for three days, chances are negligible that the stock that she have sold three days earlier, would remain at the same price three days after. It is something which has negligible probability. So technically, its not simply possible.

2. Every transaction of buy or sale of stocks is recorded not only at Lisa's books of accounts, it has a simultaneous record at exchange, and custodian of the stocks (depositories). Even if she is successful in fudging at her end, she cant fudge with the records at exchange or depositories.

3. As a responsible citizen, its the responsibility of every individual to pay 100% of its tax liability. A government cannot just run, without funding, it needs money to provide protection to its citizen, to provide with basic infrastructure like roads,dam etc. By looking forward for means to manipulate, for not paying taxes. She is commiting an illegal act.

She should not be thinking of such illegal activity on her part, be a responsible citizen by paying taxes for which she is liable to pay. Advise to her would be to remain attentive and carefull next time, she will get enough of opportunities in future to save her tax. Let her not play with law, and think of manipulating records, it is never as easy and simple as she thinks, if caught it can have a serious repurcussion on her. She would have to face legal action, as well as loss of trust and goodwill in the society.

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