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What is the PCE inflation index?

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The PCE inflation index refers to the Personal Consumption Expenditures price index, which is a way to measure inflation or changes in the overall price level of goods and services in an economy. Inflation is the rate at which prices increase over time, meaning you need to pay more for the same things.

The PCE inflation index looks explicitly at how prices change for the things people buy consume or use in their everyday lives. It considers a wide range of goods and services, such as food, housing, transportation, healthcare, and more.

The index compares the prices of these items over time. It starts with a base year and assigns a value to the basket of goods and services people typically buy during that year. Then, it tracks how the prices of those items change from year to year. By comparing these changes, it can tell us if prices are going up (inflation) or going down (deflation).

The PCE inflation index is widely used because it provides a comprehensive view of price changes and is considered a more accurate measure of inflation than other indices like the Consumer Price Index (CPI). It is often used by policymakers, economists, and businesses to monitor inflation and make decisions based on the trends in prices.

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Non-qualified stock options: How your NSOs work

Startups and other organizations frequently offer two primary kinds of stock options as part of their compensation packages for employees: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). In addition to these, companies may present other forms of equity-based rewards such as Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs). Each of these comes with its own tax implications as set forth by the Internal Revenue Service (IRS). This guide focuses on the intricacies of NSOs. What You Will Learn: Understanding NSOs Taxation of NSOs How to exercise NSOs What are Non-Qualified Stock Options? Unlike ISOs, which offer tax advantages, Non-Qualified Stock Options (often abbreviated as NSOs or NQSOs) don’t come with preferential tax treatment. Apart from employees, NSOs can also be awarded to freelancers, advisors, and external board members. While ISOs are generally tax-free upon exercise, NSOs will usually incur taxes both when you buy the shares (exercise the options) and when you sell them. With NSOs, you gain the right to purchase a predetermined number of shares at a specific price, commonly referred to as the strike, grant, or exercise price. The company’s 409A valuation or Fair Market Value (FMV) sets this price. If the share’s value rises over time, you stand to profit from the difference (known as the ‘spread’) between the fixed purchase price and the price at which you sell the shares. Tax Implications of NSOs When you exercise NSOs, you’ll owe taxes on the spread, i.e., the difference between the strike price and the current FMV. If you’re an employee, the company will typically withhold the requisite income tax at the time of exercise. As a freelancer or advisor, you’ll need to make tax payments directly to the IRS. For example, if you exercise 100 vested options with a grant price of $1 and the shares are now worth $2, you’ll incur taxes on the $100 gain. Selling Your NSOs After exercising the options, you have the choice of immediately selling the shares or holding them. Selling them right away means you’ll pay ordinary income tax on the spread and avoid capital gains tax. If you sell within a year, you’ll pay short-term capital gains tax on any profits. If you hold for more than a year, you’ll benefit from the lower long-term capital gains tax rate. Qualified Small Business Stock Exclusion If you hold onto NSO-derived stock for at least five years, you might qualify for the Qualified Small Business Stock (QSBS) exclusion, which would allow you to sell the stock without facing federal capital gains taxes, under certain conditions. Tax Summary: Exercising NSOs: Expect to pay ordinary income tax on the spread. Immediate Sale: Ordinary income tax applies on the spread. Selling within a year: Subject to short-term capital gains tax. Selling after one year: Eligible for long-term capital gains tax. Selling after five years: May qualify for QSBS exclusion, potentially owing no federal capital gains tax. When to Exercise NSOs The opportunity to exercise your NSOs generally occurs according to a set vesting schedule. You can exercise them as soon as they vest, or choose not to. Payment options may include cash or a ‘cashless’ exercise, where a portion of your shares covers the exercise cost. If you leave the company, a post-termination exercise period (PTEP) often applies, giving you a limited timeframe to exercise your vested NSOs. Failing to act within this period means losing the opportunity. To optimize your financial outcome, consult a tax advisor before exercising or selling your NSOs. While they can’t forecast your company’s stock performance, they can help you strategize to minimize your tax burden.

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August 29, 2023 No Comments
Articles
Kevin Taylor

What should I know about Bitcoin?

Let me be clear from the beginning, there is a demand for a stable value, inflation-resistant currency in the world. It’s not Bitcoin.  Bitcoin might be the first through the door, it may revolutionize the zeitgeist ways we discuss the usage of currency and it might be an early aid in getting people around the world out of using their destabilized local currencies. But it will more likely be the myspace of currencies.  Inflation Hedge: Bitcoin can be a store of value  Bullish Bitcoin advocates have routinely promoted the digital coin as a reliable store of value.  They are convinced the digital currency can be a store of value assets like, commodities, or currencies that maintain their value. So many of these advocates see bitcoin as an “inflation hedge.” And while it might be, I think there is a far greater concern that it outpaced any reasonable amount of hedging it was capable of. In 2020 inflation on the CPI was 2.3%, arguing that the buying power of U.S. dollars shrunk by 2.3%, but the bitcoin rose 66%. I would contend that while a small portion of the change was the result of inflation, the other 63.7% was pure speculation. Let’s look at other stores of value, say copper. When the price of copper increases by say 6% in a year, the first 2.3% can reliably be because the buying power of cash deteriorated in comparison to copper over the course of the year.  The 3.7% delta is due to increased demand for copper usually as a result of its utility. Thus, the increase is driven by underlying market functions for copper. I think the same argument should be made for bitcoin, that the first amount it increases in value is the result of inflation and the second is the result of speculation on inflation. The speculation element is almost 29 times higher than the inflation rate in 2020. I think with that ratio of inflation hedging capacity to speculation being so wide it cannot be a reliable replacement for traditional inflation hedges. Let’s then add a more practical element, Bitcoin fever is not the honest result of people hedging their inflation bets. I don’t believe most of them are concerned about the pace of inflation that they can justify a 66% run-up as a concern for the Federal Reserves’ buying rate. It’s more likely the result of seeking a high return on assets. This is then where I am truly concerned about Bitcoin (or any cryptocurrency) being considered a store of value. Let’s then take a look at the utility of Bitcoin. Some of the value of other stores of value is that they have an intrinsic utility. Arguably, they were a reliable “store of value” before they were thought of that way by markets. Since the dawn of commerce, traders have used precious metals and industrial metals to store value. They have a legacy of usefulness. Gold was made into jewelry early, then coinage, then dentistry, and now it’s mission-critical in aerospace and technology. It has always had a drop-dead value because of its innate function. So if you were worried about the governing power that developed a currency, in 700BC or 2021, dropping to zero, the store of value would still have some intrinsic usefulness. I’m not sure the same could be said for bitcoin, because unlike other commodities and precious metals I can’t make a house with it, mold it into utensils, or wear it around my neck. Bitcoins value without its relationship to other currencies is $0. Market Hedge: Bitcoin can hold value when markets fall For this, I think it’s important to look at the behaviors of the people who are buying both the market and the underlying fundamentals of each. I think that it is true, that both the market and Bitcoins are inflation-hedged assets. Only one of these makes sense over time. Additionally, we look at the correlation of the greater market to Bitcoin. In terms of volatility, like March of 2020, we saw equity high volatility in Bitcoin. In times of expansion, we see similar directionality. I think a greater, more lasting argument can be made that Bitcoin’s success and the success of the market are the results of the same underlying causes of liquidity. As we generate more money in the world, the price of assets rises, this shouldn’t be a shock. What does become a point of distinction between the two is that while Bitcoin can arguably “inflate” as long as the de facto Crypto is still Bitcoin. What it cannot do, is provide the investor cash flow in the future. The market however is the representation of ownership over future cash flows. So when markets “sell-off” there is a bottom-rung where the price of future earnings is too appealing and recruits investors back to the marketplace. With no such promise of future cash flows from bitcoin, what becomes the bottom rung? For most commodities, it becomes its intrinsic value, for Bitcoin that is $0.  Fixed Asset: “Bitcoin is a fixed amount and there will never be more” This is kind of an illusion. Yes, there will be a fixed amount of Bitcoins, but not a fixed amount of cryptocurrencies. Each currency type will have its own value, function, and framework. So if in the infinitely expansive ecosystem of “coinage” something comes along that can supplant the “fixed” appeal of bitcoin, and have some other benefit, the appeal of Bitcoin erodes overnight. Say for example a “fixed amount currency”, more granular than bitcoin, or fixed amount and acceptable in Costco whatever the case is, becomes the Bitcoin+ currency of choice.  Then it becomes a question of “How long will people accept my bitcoin?” and then it’s a run for the door trying to not be the last person holding a tulip. The race will become how many Bitcoin+ will I be able to exchange for my Bitcoin. So the argument that it’s “digital gold” is valid until there

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February 22, 2021 No Comments
boulder investment management, tax planning, k-1, real estate
Articles
Kevin Taylor

How to read a K-1?

Welcome to the exciting world of K-1 forms! Okay, let’s be honest, K-1 forms may not be the most thrilling topic, but understanding them can save you some serious tax headaches. In this blog post, we’ll break down everything you need to know to read your K-1 form like a pro. Whether you’re a seasoned investor or a first-time partner, we’ve got you covered. So, put on your reading glasses, and let’s get started! Reading a K-1 form can be complicated, but here are some steps to help you understand the information provided: Understand the entity type: The K-1 form will indicate whether the entity is a partnership, S-corporation, or LLC. Each entity type has different rules for tax reporting, so it’s important to know what type of entity you are dealing with. Identify your personal information: The K-1 form will include your personal information, such as your name, address, and identification numbers. Make sure this information is correct. Review the income section: The K-1 form will report your share of the entity’s income. Look for the “Income” section of the form and review the amounts in each box. These amounts will need to be reported on your tax return. Review the deductions section: The K-1 form will report your share of the entity’s deductions. Look for the “Deductions” section of the form and review the amounts in each box. These amounts will also need to be reported on your tax return. Review the credits section: The K-1 form may report any credits you are entitled to, such as foreign tax credits or energy credits. Look for the “Credits” section of the form and review the amounts in each box. These amounts will be used to reduce your tax liability. Look for any other information: The K-1 form may include other information, such as capital account balances, distributions, or other items. Make sure you review all sections of the form to ensure you are reporting all necessary information on your tax return. Seek professional help if necessary: If you are unsure about how to read or use the information on the K-1 form, seek help from a tax professional. They can help you understand the information and ensure you are reporting everything correctly on your tax return. In summary, to read a K-1 form, you should identify the entity type, review your personal information, and review the income, deductions, and credits sections. Look for any other important information and seek professional help if necessary.

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March 15, 2022 No Comments

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