Business Adventures: Twelve Classic Tales from the World of Wall Street

by John Brooks

Probably the most important special-interest provision in the Code is the one that concerns capital gains. The staff of the Joint Economic Committee of Congress wrote in a report issued in 1961, “Capital gains treatment has become one of the most impressive loopholes in the federal revenue structure.” What the provision says, in essence, is that a taxpayer who makes a capital investment (in real estate, a corporation, a block of stock, or whatever), holds on to it for at least six months, and then sells it at a profit is entitled to be taxed on the profit at a rate much lower than the rate on ordinary income; to be specific, the rate is half of that taxpayer’s ordinary top tax rate or twenty-five per cent whichever is less. What this means to anyone whose income would normally put him in a very high tax bracket is obvious: he must find a way of getting as much as possible of that income in the form of capital gains. Consequently, the game of finding ways of converting ordinary income into capital gains has become very popular in the past decade or two.