Warren Buffett (Trades, Portfolio) was interviewed by Becky Quick from CNBC earlier this month.
They discussed quite a few topics, but the one thing that really struck me was how the potential change in tax code has changed Berkshire's (BRK.A, Financial)(BRK.B, Financial) behavior – Berkshire's accelerated selling the losers while delaying the gains on winners.
Buffett has also suggested that the market may have been substantially affected if a lot of people are doing the same thing as Berkshire. Prior to watching the interview, I had not thought about the consequences of the change, or nonchange, in tax code. But now it's worth it to think about the consequences and prepare for the opportunities that might come out of it. Below are transcripts from CNBC for the part where Buffett and Quick discussed the tax code.
BECKY QUICK: I realize that interest rates are not something that you often think about other than on a very broad scale. You've also said that taxes aren't something that you think about other than on a very broad scale. Is that the case this time around?
WARREN BUFFETT: Well, I think about them plenty right now because we may or may not have a change in the tax code. And we have lots of stocks with lots of gains. And we have a few stocks with losses. And here we are in October, and if something happens that changes the tax rate significantly on Jan. 1, it would pay me, assuming that they would reduce rates on capital gains or corporate rates, it would pay me to sell the losses now and defer the gains until next year.
And I think there's a lot of that going on. Because I think there's an expectation that if they have a tax act it will be they will cut the rates. Certainly corporate rates. And it'd be kind of foolish to have a gain now and pay 35% tax on it if by waiting a few months you were likely to pay 25%. So it actually very seldom enters into our thinking. On balance we'd rather sell things with losses than gains. But right now, we're sitting and watching because within three months, actually less than that, we'll know the answer on this as to whether this was the year to take losses and not gains. And we've got actions on both sides that we would take.
BECKY QUICK: So you're actually stopping what you're doing at Berkshire. This is not just your personal account. So that's an actual change in your behavior that I've never heard you say.
WARREN BUFFETT: It doesn't happen very often that you're in the month of October with a major tax act being a real possibility. Who knows whether it's a 20% chance, 50% chance? But one thing I know about it. I'll know the answer within a month or two. I mean, there are not that many days left to legislate. And I would feel kind of silly if I realized a billion dollars worth of gains to pay $350 million of tax on it if I just waited a few months and would have paid 250. Now, if enough people are doing that, that may mean that the market's being affected fairly substantially.
BECKY QUICK: Right. That's what is the broader play in the market as a result? 'Cause if you're doing it, you've got to imagine lots of people are doing it.
WARREN BUFFETT: I think that's true. I think that's true.
BECKY QUICK: You're talking about billions of dollars of potential sales.
WARREN BUFFETT: Well, maybe hundreds of billions here. And you may be talking about people that it would tend to depress stocks that have behaved badly because people would be taking the losses now. And it would tend to defer gains and reduce the sellers currently that would be in stocks with very large appreciation.
I can tell you it's an actual factor at Berkshire. And it's very, very, very seldom in my 87 years that it has ever been a factor.
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