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Does The US Treasury Owe Capital Gains Taxes On AIG Profits?

JB Reed | Bloomberg | Getty Images

The Treasury Department's $7.6 billion sale of 234 million shares of AIG brings the government's profit from its stake in the insurance giant to just under $23 billion.

One question that comes to mind is whether the timing of this sale of the last of the Treasury's stake in AIG allowed the Treasury to avoid rising capital gains taxes in 2013. In 2013, when the law that temporarily lowered capital gains rates expires, the rates on long term capital gains are set to rise from 15 percent 20 percent. Lots of investors are attempting to lock-in gains now to avoid paying the higher rate. Did the Treasury just do the same thing?

JB Reed | Bloomberg | Getty Images

Unfortunately for this theory, the Treasury is tax-exempt. So instead of owing the roughly $3.4 billion in taxes any other investor would on a $23 billion gain, the Treasury owes nothing at all. That tax exemption, by the way, means that the Treasury's after-tax return on the AIG investment is higher than it would be if a private entity had undertaken the same actions. And people talk about the hedge fund tax loophole!

Looked at from another direction, however, the Treasury is the most taxed investor in the world. All of its profits wind up in the government's general fund. So it actually faces something like a 100 percent capital gains tax. What's more, it forfeits not only its gains but all of the proceeds from the sale.

The mechanics of what happens to the money are actually quite interesting. Jeffrey Sparshott at Real Time Economics explained them after the Treasury's September AIG offering. The investors buying the shares of AIG from Treasury make payments to JP Morgan Chase, which acts as the administrative agent for the deal. The Treasury and JP Morgan then sign agreements authorizing the money to be transferred via the Federal Reserve's Fedwire Funds Service to the Treasury's account at Bank of New York Mellon. What this means is that the Fed debits the digital account of JP Morgan and credits the account of BoNY with the money.

The real-world effect is to reduce the amount of money the government will borrow by a tiny bit. Today's $7.6 billion in proceeds buys just over half a day of spending before we hit the next debt ceiling.


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