Paul L. Caron

Friday, September 7, 2012

Magliocca: Escrow of Capital Gains Taxes on Stocks and Bonds

Gerard N. Magliocca (Indiana-Indianapolis), Escrow of Capital Gains Taxes on Stocks and Bonds:

Here’s a question for tax experts out there.  Why don’t brokerages escrow capital gains taxes in a manner similar to a bank escrow of property taxes on a mortgage?  It would seem to make sense from the perspective of the customer (you wouldn’t have to pay capital gains as a lump sum every quarter or every year), and from the perspective of the IRS (they could more efficiently collect taxes from a small group of brokerage firms and could, in theory, collect them in real time)?  Is there any reason why this practice is not used?

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Mortgage lenders require escrow of property taxes because if the taxes aren't paid, the municipality would acquire a lien on the property that is superior to the bank's mortgage. So they would be directly and adversely affected. But the stockbroker has no exposure to the customer's capital gains taxes. Besides, customers wouldn't like it and unlike many mortgage borrowers, the customers aren't supplicants.

Posted by: Mitchell S. Fishman | Sep 8, 2012 9:26:12 AM

Maybe because mortgage companies escrow property taxes based on actual (or at least predictable) tax bills, but a brokerage doesn't know its customer's tax rate? Or whether the customer has losses to offset the gains?

Posted by: Anonymous | Sep 7, 2012 4:42:47 PM