TikTokTax

Turn the dial on the Wayback Machine to 1948. Pee Wee Hunt’s “Twelfth Street Rag” is tearing up the charts. Ford Deluxes are flying out showroom doors. And Harry Truman is running for a second term as president. But the Republican-led 80th Congress is blocking most of his “Fair Deal” agenda. So Truman dubs them the “Do Nothing Congress,” gives ‘em hell, and squeaks by Republican nominee Thomas Dewey that November.

How many laws did Truman’s do-nothing Congress pass? 906. How many has our current Congress passed? 48. Talk about doing nothing!

It turns out that one of the few things this gridlocked Congress can pass is a law potentially banning the Chinese-owned app TikTok. Granted, many of the app’s 170 million American users are too young to vote. However, Congress is worried the Chinese Communist Party could force the owners to hand over user data, or, more ominously, manipulate the app’s content to favor the CCP.

But TikTok isn’t owned by the CCP, it’s owned by a private company called ByteDance. And it turns out that one of ByteDance’s owners is an American with a long history of working to avoid taxes. Jeff Yass is the son of two CPAs, which may help explain that particular sensitivity. Forbes pegs his net worth at $27.6 billion, and he routinely earns a billion or more per year. Most of that income comes from high-speed option trading, taxable as ordinary income at rates close to 40%. But leaked tax returns and interviews with Yass’s colleagues show that nearly 100% of his trading income is taxed as long-term capital gains, capped at just 20%.

How does Yass do it? A report from independent newsroom ProPublica reveals that he uses “straddles” – offsetting bets on the same position – to create artificial losses to offset his high-taxed gains. Let’s say he buys long and short positions on Coca Cola, on the same day. At the end of the year, one of those positions will be up and the other will be down. He sells the losing position on Day 365, when it’s still treated as a short-term transaction – taxed as ordinary income — to capture the loss. Then he sells the winning position on Day 366, when it’s treated as long-term gain and taxed at half the ordinary rate. He hasn’t made or lost any real money. But when tax time rolls around, he can use his short-term losses to wipe out the income on his real trading and replace them with the lesser-taxed profits from the straw man holdings.

Easy peasey, right? Of course, the IRS figured all this out long ago. Otherwise, your uncle Morty the know-it-all would be doing it, too. Congress has passed complicated rules stopping traders from taking losses when holding offsetting positions “substantially reduces the risk of loss.” In response, Yass uses a special partnership to buy individual stocks while betting against the markets as a whole. The trades don’t offset 100%, and Yass has clashed with auditors. Still, it’s been close enough to save him a billion in tax, according to ProPublica.

Today, Susquehanna owns 15% of ByteDance and Yass himself owns 7%. He’s has become one of the biggest political donors in the country, giving more than $46 million so far in 2024. It’s hard to believe he didn’t hope his beneficiaries would remember him when it came time to vote on TikTok. Did they? A year ago, the talk focused on banning it. Now, it’s far likelier that ByteDance will find a domestic buyer.

You probably aren’t trading billions like the characters out of a Michael Lewis book. But if you’re investing anything at all, you have to consider taxes. That’s our job! Call us before you buy and see how much we can help you save.