Norway imposes a net tax on share gains, equal to 22 percent of the gain per income year. Is it possible to design a screen criteria or simulation that incorporates the tax effect: (profit - loss) = outcome / 0.22 percent ?

Hi Whycliffes,

one way to approximate this would be to have a constant cash position of 22%

A buy rule like “CashPct > 20” would be a start. Another alternative would be a model with near-constant 22% hedge - but I think you can only use a low volatility bond as hedge, not cash.

hth,

Florian

Thank you, sevensisters; that was a good idea. Even if it is imprecise, it can provide an indication of the impact of annual taxation burden on the portfolio performance.

Is this tax levied on unrealized gains or realized gains?

According to PWC:

Gains on shares and dividends are adjusted by 1.44 before being taxed at the rate of 22% income tax. The effective tax rate on gains on shares and dividends is therefore 31.68%.

That would mean realized gains, not paper gains.

Also dividends are reduced by a risk-free return interest rate applied to the basis.

If the dividend is greater than the risk-free return, the excess will be taxed as ordinary income.

In 2020 and 2021, share income will be multiplied by 1.44 (22 percent x 1.44 = 31.68 percent).

Yes, it is absolutely right as it is said above.

But to avoid too complicated a calculation of the tax effect, I would use 22%, because:

- We have tax exemptions for certain types of stock accounts
- We have tax exemptions for companies that gain from the sale of stocks
- The multiplying factor changes every year
- There is also a tax exemption for capital income below risk-free interest. This is determined at a rate each year by our own Ministry of Finance

So our capital gains tax, for net positiv capital income is as a starting point 22%

And yes, it is on realized gains.

https://taxsummaries.pwc.com/norway/individual/income-determination

I would like to follow up on this post.

I wanted to investigate the effect of having to pay an annual tax on the profit of the portfolio versus not having to pay an annual tax, but deferring it until the end, so that each year you can actually invest the amount you would otherwise have paid in taxes.

Am I understanding this correctly that “CashPct > 20” means holding 20% of your total investment in cash, not just 20% of the annual profit? If so, the result will not be entirely accurate.

Is there another way to investigate the effect of having to pay 22% annual tax on the profit, instead of being able to reinvest it?

Is this a more correct approach? Let’s say I take the average annual return, which we set at 40% on average each year. That means the strategy of 100USD earns $40 USD in the first year, and should have paid 22% of this, which is about $9 USD. Of the total $140 USD, $9 USD is around 6%. So, from an annual growth of about 40%, 6% of the total amount must be set aside each year for taxes on the annual 40% growth ?

Yes, you understand it correctly. It refers to the total portfolio, not just the annual profit.

I don’t know how you would be able to implement this for the profits only. One metric that measures your gain would be gainpct, so you would have to work out a tax percentage based on gainpct. However, this would only work if you hold a stock longer than 1 year, as gainpct only calculates per holding, not for the entire portfolio.

The tax thing is tough. You can do some tax loss harvesting in December to lower capital gain returns. One thing I like about Canada is the Tax Free Savings Account. You can put around $88,000 CAD in it as of today. And add about $7K next year and so on. Everything made inside the account is tax free and can be pulled without paying additional taxes. It isn’t like RRSPs where it grows tax-free and then pay the tax to get it out (typically when you have lots of money and pay very high tax getting it back). TFSA’s already have tax paid on money that goes in and whatever grows in there is yours. The only issue is that they don’t let you ‘run a business’ in your account. You can’t day trade or do certain options strategies that are considered business income rather than investment returns. This doesn’t answer your question but I just wanted to put in a plug for these accounts. Is there something similar in USA?

I’m from Norway, but yes, we have something similar to what you have. We can use this account tax-free to buy stocks and up to 20% bonds throughout the EU.

" Is there something similar in USA?"

In the USA, 401Ks (business to employee investment accounts, these days typically in lieu of a retirement plan) and IRAs (Individual Retirement Accounts) allow annual personal investments that reduce reported taxable income, up to limits based on income levels. Most withdrawals become income for tax purposes and a tax penalty is normally added for withdrawals before a specified age. Taxation of IRA withdrawals can vary at state levels. ROTH IRAs contain income that has already been taxed, grow tax free, and all withdrawals are usually tax free after a certain age if you have had a ROTH for a minimum of 5 years. The use of margin, short selling, and the sale of uncovered options are not allowed in these type accounts, if memory serves me correctly.

So nothing where you put in capital where income tax is already paid and 100 percent of future returns is tax free? I like it because if you invest and pull out a 2 million chunk tax free when the need comes

Yes, a Roth IRA is like that but you have to be 59.5 years old and have had the Roth IRA for at least 5 years in order to withdraw with no penalty.