The securities you buy have substantial hidden costs.
The accounting treatment used for dividends and capital gains overvalues income-producing securities by an amount equal to the security’s accrued but unpaid income and causes investors to pay tens of billions of dollars in taxes they should not owe. This problem is a “known risk” that financial services firms and auditors recognize and is referred to as “buying a dividend.”
The payment system used to distribute income from a security to its investors is limited and inefficient. It is designed to only pay income to those investors who happen to own the securities on one designated day of the income payment period – usually the last day.
For this system to function properly, a security’s accrued or unpaid income must be treated as an asset and added to the value of a security. However, any income that will be distributed by a security to its investors is, as an economic matter, a payable liability.
Therefore, the act of treating liabilities as assets overvalues the security, resulting in investors purchasing fewer shares and earning fewer future dividends.
Furthermore, it is a generally accepted accounting principle that all or a portion of the first dividend, long-term capital gain, and short-term capital gain distribution a security makes after an investor purchases it represents a “return of a portion of the investor’s capital” and should, therefore, not be taxed. Unfortunately, current systems used by financial services companies cannot determine the taxable vs. non-taxable portion of the dividend resulting in the full taxation of non-taxable distributions. The inability to account for the portion of a distribution that represents a return of the investor’s non-taxable distribution creates tens of billions of dollars in annual over-taxation and investor losses.
Bottom Line: Investors are paying taxes on income that does not exist. This is like being taxed each time you withdraw money from an ATM. The money you receive from the ATM is not income, you are merely moving the money from your bank to your pocket. The money you withdraw does not represent new income, and it does not increase your net worth.
We estimate this problem causes tens of billions of dollars in losses annually and reduces the quality of life of 142 million people in the US alone, who rely on the stock market for their well-being in retirement.
At FairShares, we are passionate about delivering the transparency investors deserve. When investors leverage DistributionRisk Analytics to manage their money, they can minimize risks, maximize returns, and as a result, keep more of what they earn.