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Warren Buffett has spent 2024 reducing some of the biggest investments in the Berkshire Hathaway (NYSE:BRK.B) stock portfolio. The main reason is the capital gains tax.
As I keep my investments in a stocks and Shares ISA, I don't have to worry about this. That's why I'm looking to continue investing, instead of following the Oracle of Omaha.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Investment earnings
During the first half of 2024, Berkshire sold 505,560,000 shares in Apple – more than half of its participation. And the tax implications of this have been significant.
During this time, shares traded between $165 and $216 per share. So at the midpoint of that range, Buffett could well have been selling at an average price of around $191.
According to analysts, Berkshire's cost basis for Apple stock is about $35 per share. If that's correct, the company made around $79 billion in profits.
Or at least it would have been if those gains hadn't been subject to capital gains taxes. And that's where things get interesting.
Capital gains taxes
In the United States, capital gains taxes for corporations are 21%. That means Berkshire will have paid out about $16.5 billion of its profits to the government.
Buffett noted at the annual meeting that this was an unusually low level and was likely to rise. Two months later, the Biden administration proposed increasing this figure to 28% in 2025.
A change of government means this is unlikely to happen. But if it were, Berkshire's tax bill would have risen to $22.1 billion on the same basis.
In other words, Buffett's decision to sell during the first half of the year could have saved Berkshire $6 billion in taxes. That is a significant result.
Coca-cola
These types of tax considerations also explain why Buffett hasn't been selling shares in Coca-cola. In 1994, Berkshire completed the purchase of 400,000 shares for $1.3 billion.
Today, that stake is worth $25.5 billion, which would mean $24.2 billion in pre-tax profits. But that figure would drop to $19.1 billion after taxes.
Berkshire receives about $776 million a year in dividends. To do better with $19.1 billion, the company would have to find a stock with a greater than 4% yield and better growth prospects.
That might be impossible, which means Buffett selling Coca-Cola stock doesn't make sense like it does with Apple. In the case of Coca-Cola, Berkshire would be better off simply collecting the dividends.
Why don't I have this problem?
It's nice to have Buffett's problem of having earned 450% on an investment. But if I ever find myself in this situation, I won't have to have a say in what future tax rates will be.
Keeping my investments in a stocks and shares ISA means they are not eligible for capital gains tax. This way I can keep them without having to worry about losing profits due to taxes.
