Lesson 25 of 25 · 8 min

What none of this tells you about your own return

Identical inputs run through two assumed characterisations diverge by a quarter of the gain, and neither assumption was yours.

The preceding twenty-four lessons described the shape of rules. Not one of them determined anything about any reader, and this lesson exists to make that arithmetically obvious rather than merely to assert it again.

Take one invented sale and change nothing about it. Proceeds are $1,382,000 and the basis attached to the shares sold is $417,500, so the gain is $964,500. Under an assumed characterisation of 18.5 percent the figure is $178,432.50 and $1,203,567.50 of the proceeds remain. Under an assumed characterisation of 41 percent the figure is $395,445.00 and $986,555.00 remains. The inputs are identical to the dollar. The results differ by $217,012.50, which is 22.5 percent of the gain — exactly the 22.5-point gap between the two assumptions.

Seven variables decided which of those two columns applied, and none of them appears anywhere in the sale itself:

The jurisdiction whose rules govern the holder.
Where the holder is resident, and whether that changed during the period.
Whether the asset was held directly, through an entity, or through an arrangement.
How long it was held, and whether anything suspended or restarted that count.
The character of what arose, which lessons 15 to 17 showed can turn on days of exposure rather than on the instrument.
The specific documents that were signed, including ones signed for credit reasons rather than tax reasons.
The year, because rules change and a rule can be revised with effect from a date already past.

The combination is the problem. Seven variables that each take several values do not produce seven questions; they produce one question with a very large number of possible answers, and exactly one of them is a given reader's. That is why no general description can land on it, and why the arithmetic above honestly produces a range rather than a result.

Everything in this track is the shape of a rule. None of it is a conclusion about your own return, and the only route to one is a qualified adviser working from your actual facts, your actual documents and your actual year.

Key terms

Characterisation: The class a gain or a receipt falls into. It is settled by rules and facts around a transaction rather than by the transaction itself.
Assumed rate: A percentage introduced only so an example's arithmetic can be followed. It describes no system and states nothing about any reader.
Facts and circumstances: The specific individual details — residence, structure, dates, documents — that determine an outcome and that no general description contains.

Worked example

One sale, two assumed characterisations

An invented disposal. Proceeds of $1,382,000 and basis attached of $417,500. Both percentages below are assumptions made so the arithmetic can be followed, and nothing more.

Gain: $964,500
Under an assumed 18.5 percent: $178,432.50
Proceeds remaining on that assumption: $1,203,567.50
Under an assumed 41 percent: $395,445.00
Proceeds remaining on that assumption: $986,555.00
Difference: $217,012.50

Identical inputs and a gap of $217,012.50. Which assumption applies was settled by facts that appear nowhere in the sale.

Check yourself

A disposal produces proceeds of $1,382,000 against a basis of $417,500, and the same gain is run under two assumed characterisations of 18.5 percent and 41 percent. What does the spread between the results say about the twenty-four lessons before this one?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.