Commodity trading book - The new stock is not a bit better than the old, and we have voluntarily increased our Federal income-tax bill for 1957.

(Sometimes a man may wisely make a sale purely in order to pay a tax this year rather than later, but that is outside the scope of this chapter.) The example just given is designed to show that when the proceeds from sale of an investment are to be reinvested, the cost of the old investment has no bearing on the wisdom of making the sale. What matters is the cost of the new investment, the replacement cost, compared to the selling price of the old one. Curiously enough, on one kind of property Federal income-tax rules conform to the principle of measuring profit by replacement cost, thus contradicting their rules on sales of other types of property. When a man who owns the house he occupies sells it and buys another one promptly, paying more for it than he did for the old one, he can use the cost of the new home rather than of the old one in figuring his capital gain on the sale of the old house. Suppose the old house cost $10,000, was sold for $20,000, and the new one costs $19,000.

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[tags]Commodity Market Trading[/tags]