A depreciating currency with a capital gains tax is evil.

If a country has a currency that is loosing value, and a tax on capital gains at the same time, you loose. There is no way for you to save for your future, and not be thieved from in some sneaky, hard to detect way. This situation applies to most people, certainly in most western countries. The monetary system appears so rigged, such a mugs game to me at this point, figuring out how to save for the future is not obvious, the basic problem is the following.

Say you want to save money for something in your future, it could be in the far future, like a pension. So what do you save in? Your local government currency? That’s a rapidly depreciating asset. Some countries currencies are falling more rapidly than others, but they’re all headed downward. If you save in that, you’re the mug, stacking up tokens that buy less and less as time passes. It’s like trying to walk up-stairs on the downward escalator, you’d have to walk just to stand still. Most central banks have a 2% inflation target, they openly admit that they are trying to shave 2% of real value of their local currency, each year. 2% compounded over many years can erode a nice fat hole in your cash savings. The funny bit is that even this number is an underestimation. The CPI figure that governments put out is highly massaged, and the real rate of currency debasement, in relation to real good and services, is certainly much higher than 2%.

So lets say you understand this, and you want to protect your savings. You want to work and save now for a greater goal in the future, maybe the far future, like retirement. So you decide to buy a hard asset, like real estate, or gold. Something tangible that will hold it’s value over long periods of time.

So as the currency devalues, everything goes up in price, because it’s value is measured in that currency. Everyone is making capital gains, on everything. But only nominally, not in real terms. Everything is still worth the same in real terms, just the yard stick by which we measure value has been shortened, and so it takes more currency to represent the same things of real value.

You try to protect yourself, with say for example, gold coins. The gold coins become worth more in local currency, as the currency devalues. The the government then comes along and says, you owe us money mate. Even if you’ve stood still in real terms, and any ‘gains’ are only attributable to the devaluation of the definition of value, whatever your local currency is. You’ve made phantom capital gains, and you must pay tax on this.

So you either stay saving in your local governments currency, and watch your saving waste away. Or you try to get out and get punished by a capital gains tax. You loose or you loose. Not paying capital gains tax is illegal, regardless of how rapidly your local currency is plunging, and they all are plunging, just taking turns at differing speeds of devaluation. The more it devalues, the more tax you owe.

I know there are some clever ways around this, legal loopholes you can use to mitigate this problem or, even largely reduce it. But the idea that saving for the future is fatally flawed, that it contains a huge ‘gotcha!’, that’s actually not a simple problem to resolve, depending on what country your in, is some idea isn’t it? Most people are going to be bitterly disappointed in the results of their pensions, mostly because of this devaluation of the currency.

Here’s one random way (for UK residents) that I’ve found to save for the future in a low risk, conservative manner, free from this thieving situation of capital gains tax and simultaneously devaluing pound. You can buy legal tender gold coins, from the Royal Mint, free from both CGT and VAT. There are many countries in the world where you can’t do that, even gold has CGT. So there’s one nice little escape hatch you can use to put at least some money. I think everyone in the UK should be aware of this and hold at least a little bit of gold, and take advantage of this situation we have that people elsewhere don’t have.

As a side note, I think saving in Bitcoin is still a great idea. I expect the price of Bitcoin to rocket to such a degree over the medium to long term, that even if you have a high CGT to content with, you’ll still make a very good return.

Bayon.