So maybe a few examples, because I won’t pretend to know every little aspect of the stock market myself:
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You buy 1 share of company X at $1000. Unless this company X is currently offering new shares, you buy this single share directly from someone else. The person on the other end of this trade would then have to pay e.g. 25% of their gains over the year so far (that’s the capital gains tax in Germany).
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Company X’s business is going great, and the stock price goes up to $1050 over the next year, and up to $1100 over the second year. You decide to sell your one share again, at this price, so you get $100 in profit. Right now, you would then pay $25 to the government. That’s $25 over 2 years. With the change, you would owe the government ($1050 - $1000) * 25% = $12.50 after the first year of holding your one share. It would be treated as if you would have sold your share after one year, paid your tax, and then re-bought the same share right away. Where does this money come from and how do you pay your owed taxes? The price of this stock would be set to $1000 + ($1050 - $1000) * 75% = $1037.50, and the $12.50 in profits of every share in circulation would be paid directly to the government (your government, wherever you pay your taxes). This way you already paid your taxes. So the stock gets to “keep” 75% of the profits it has made over the year. The stock is now at $1037.50, and again goes up by $50 over the second year. Same as above, price is reset to accommodate for profit taxes. After two years, the stock would have paid a total of $25 for every share, and would be set at ($1037.50 + $50 * 75%) = ($1037.50 + $37.50) = $1075.
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If you decide to sell your share after 1.5 years, because you want to avoid the second year’s reset, you pay no taxes after the first year (because the stock would just be valued for 75% of profits), and you just pay 25% of whatever profits the stock made in the last six months. Maybe the price at that point in time is at $1060, so you “pay” ($1060.00 - $1037.50) * 25% = $5.625 in taxes for this trade, and get to keep $16.875 in profits for the six months. I wrote “pay taxes”, because the government would not see a single cent from that because of the other side of that trade:
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Maybe you are the other person, who buys that one share at some point during the year for $1060. However, what you are really paying is only $1600 - $5.625 = $1054.375, because that’s what this stock would be worth right now after taxes. By the end of the year the stock has climbed to $1087.50, but is reset to $1075. You sell it again at $1075. $1075 - $1075 = $0, so you pay no more taxes to sell it. Your profit over these six months is ($1075 - $1054.375) = $20.625. To compare: Right now, you would have paid $1060 for the share, the price would have gone up to $1087.50, and you would have paid ($1087.50 - $1060) * 25% = $6.875 in taxes, and thus would have made ($1087.50 - $1060) * 75% = $20.625 in profits, exactly the same.
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If people value company X less after a year, and the stock goes down, nothing would change in comparison to what happens right now.
To sum it all up: Every year, each stock would be forced to realize profits and pay taxes that way.
I will honor all of this with by reading it.
Just for a first response to your second paragraph
You will have “paid” $250 after the ten years, not $1250. So if the stock tanks, as it can with the current system, nothing would change. The point though is, that you have not actually paid that $250 out of your pocket, the stock has just gone up by a total of 1000-250 instead of the whole 1000.
So in my eyes, the risk for you is exactly the same as it is now. You still gain $750 over 10 years, and the government still gets its $250 in taxes.
– I will read the rest of your reply now, that’s just my first thought. Thanks for taking your time to think this all through :)
Second thought: Yes, I think I get what you are trying to say.
– this means the new system would have to do something during loss-years. yes, I see that now
Third thought: This makes me feel like there should be a loss-counter that could be carried over the years. This counter would have to be held for every single share, so that you would start “paying taxes” or lowering the stock price again only after you were at ± 0 again.