Unrealized Profit & Loss for Non-Stock Securities
"Suddenly its not just comparing the current price to the price of the contract, or is it? Sure it is.  Suppose you bought 100 option contracts (each for 100 shares) and paid a $1 per share premium ($10,000 total).  Now those options are trading for $1.50 per share.  You have an unrealized $0.50 gain per share, or $5,000. The $10,000 in options you bought are now worth $15,000.  It holds whether they were bought to open or close a position, or whether they are puts or calls.  The only difference is whether you bought or sold the options (the arithmetic is just reversed for selling an option). But lets say we have an Option, where the payoff is max(St-K, c0) where ct is the market price. What do you do then? Your current, unrealized P&L is different than the payoff.  The payoff only happens at maturity.  The current P&L is based on current market prices, just like stock.  Option prices all have a ""time premium"" making them worth more than their payoff (intrinsic) value prior to maturity."
A Section 1256 contract is any: Non-equity options include debt options, commodity futures options, currency options, and broad-based stock index options. A broad-based stock index is based upon the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). 60% of the capital gain or loss from Section 1256 Contracts is deemed to be long-term capital gain or loss and 40% is deemed to be short-term capital gain or loss. What this means is a more favorable tax treatment of 60% of your gains. http://www.tradelogsoftware.com/tax-topics/futures/ It's a really wierd rule (arbitraty 60% designation, so broad, etc), but section 1256 contracts get preferential tax treatment and that's what Buffett's talking about. The harvested losses are capital losses.  See this IRS page: Generally, realized capital losses are first offset against realized capital gains.  Any excess losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately) on line 13 of Form 1040.  Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up. This means that your harvested losses can be used to offset ordinary income --- up to $3000 in a single year, and with extra losses carried forward to future years.  It is pretty close to a free lunch, provided that you have some losses somewhere in your portfolio. This free lunch is available to anyone, but for a human, it can be quite a chore to decide when to sell what, keep track of the losses, and avoid the wash sale rules.  The advantage of robo-advisors is that they eat that kind of bookkeeping for breakfast, so they can take advantage of tax loss harvesting opportunities that would be too cumbersome for a human to bother with. I was emailing back and forth with a manager in a different department on how real returns are being calculated, and he said that the industry standard is 1 + real returns*(1+inflation) - fees, and to not use my formula because it can double count inflation, making fees lower. However, real returns are not observable in the future, and I do not why he uses that formula. The returns were used in an Excel spreadsheet.   What are your thoughts about this? If you do this, you own a stock worth $1, with a basis of $2. The loss doesn't get realized until the shares are sold. Of course, we hope you see the stock increase above that price, else, why do this? Generally, to be able to write off worthless securities, you need to show that they're indeed worthless. It's not necessarily easy, as you need to prove that there's no way they will regain any value in the future. What is usually done, instead, is very simple: you sell them. Many brokers are aware of this problem and will assist by buying these securities from you at a nominal price (E*Trade, for example, for $0.01, ScotTrade for $0.00), and providing a proper trade confirmation. This is a bona fide sale, so if the stock does regain value - it will be a profit for the broker. In this case - you just report it as a sale at loss. Check with your broker if they support such a solution. "For any accounts where you have a wish to keep track of dividends, gains and losses, etc., you will have to set up a an account to hold the separately listed securities.  It looks like you already know how to do this.  Here the trading accounts will help you, especially if you have Finance:Quote set up (to pull security prices from the internet). For the actively-managed accounts, you can just create each managed account and NOT fill it with the separate securities.  You can record the changes in that account in summary each month/year as you prefer. So, you might set up your chart of accounts to include these assets: And this income: The actively-managed accounts will each get set up as Type ""Stock.""  You will create one fake security for each account, which will get your unrealized gains/losses on active accounts showing up in your trading accounts.  The fake securities will NOT be pulling prices from the internet.  Go to     Tools -> Securities Editor -> Add and type in a name such as ""Merrill Lynch Brokerage,"" a symbol such as ""ML1,"" and in the ""Type"" field input something like ""Actively Managed."" In your self-managed accounts, you will record dividends and sales as they occur, and your securities will be set to get quotes online.  You can follow the general GnuCash guides for this.   In your too-many-transactions actively traded accounts, maybe once a month you will gather up your statements and enter the activity in summary to tie the changes in cost basis.  I would suggest making each fake ""share"" equal $1, so if you have a $505 dividend, you buy 505 ""shares"" with it.  So, you might have these transactions for your brokerage account with Merrill Lynch (for example): When you have finished making your period-end summary entries for all the actively-managed accounts, double-check that the share balances of your actively-managed accounts match the cost basis amounts on your statements.  Remember that each fake ""share"" is worth $1 when you enter it.  Once the cost basis is tied, you can go into the price editor (Tools -> Price Editor) and enter a new ""price"" as of the period-end date for each actively-managed account.  The price will be ""Value of Active Acct at Period-End/Cost of Active Acct at Period-End.""  So, if your account was worth $1908 but had a cost basis of $505 on Jan. 31, you would type ""1908/505"" in the price field and Jan. 31, 2017 in the date field. When you run your reports, you will want to choose the price source as ""Nearest in Time"" so that GnuCash grabs the correct quotes. This should make your actively-managed accounts have the correct activity in summary in your GnuCash income accounts and let them work well with the Trading Accounts feature." "If you sell a stock, with no distributions, then your gain is taxable under §1001.  But not all realized gains will be recognized as taxable.  And some gains which are arguably not realized, will be recognized as taxable. The stock is usually a capital asset for investors, who will generate capital gains under §1(h), but dealers, traders, and hedgers will get different treatment.  If you are an investor, and you held the stock for a year or more, then you can get the beneficial capital gain rates (e.g. 20% instead of 39.6%).  If the asset was held short-term, less than a year, then your tax will generally be calculated at the higher ordinary income rates.  There is also the problem of the net investment tax under §1411.  I am eliding many exceptions, qualifications, and permutations of these rules. If you receive a §316 dividend from a stock, then that is §61 income.  Qualified dividends are ordinary income but will generally be taxed at capital gains rates under §1(h)(11).  Distributions in redemption of your stock are usually treated as sales of stock.  Non-dividend distributions (that are not redemptions) will reduce your basis in the stock to zero (no tax due) and past zero will be treated as gain from a sale. If you exchange stock in a tax-free reorganization (i.e. contribute your company stock in exchange for an acquirer's stock), you have what would normally be considered a realized gain on the exchange, but the differential will not be recognized, if done correctly. If you hold your shares and never sell them, but you engage in other dealings (short sales, options, collars, wash sales, etc.) that impact those shares, then you can sometimes be deemed to have recognized gain on shares that were never sold or exchanged. A more fundamental principle of income tax design is that not all realized gains will be recognized.  IRC §1001(c) says that all realized gains are recognized, except as otherwise provided; that ""otherwise"" is substantial and far-ranging." "According to page 56 of the 2015 IRS Publication 550 on Investment Income and Expenses: Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities. It looks like the rule applies to stocks and other securities, including options. It seems like the key is ""substantially identical"". For your brokerage / trading platform to handle these periods correctly for reporting to IRS, it seems best to trade the same security instead of trying to use something substantially identical." "A bit strange but okay.  The way I would think about this is again that you need to determine for what purpose you're computing this, in much the same way you would if you were to build out the model. The IPO valuation is not going to be relevant to the accretion/dilution analysis unless you're trying to determine whether the transaction was net accretive at exit. But that's a weird analysis to do. For longer holding periods like that you're more likely to look at IRR, not EPS. EPS is something investors look at over the short to medium term to get a sense of whether the company is making good acquisition decisions. And to do that short-to-medium term analysis, they look at earnings.   Damodaran would say this is a shitty way of looking at things and that you should probably be looking at some measure of ROIC instead, and I tend to agree, but I don't get paid to think like an investor, I get paid to sell shit to them (if only in indirect fashion). The short answer to your question is that no, you should not incorporate what you are calling liquidation value when determining accretion/dilution, but only because the market typically computes accretion/dilution on a 3-year basis tops. I've never put together a book or seen a press release in my admittedly short time in finance that says ""the transaction is estimated to be X% accretive within 4 years"" - that just seems like an absurd timeline.  Final point is just that from an accounting perspective, a gain on a sale of an asset is not going to get booked in either EBITDA or OCF, so just mechanically there's no way for the IPO value to flow into your accretion/dilution analysis there, even if you are looking at EBITDA/shares. You could figure the gain on sale into some kind of adjusted EBITDA/shares version of EPS, but this is neither something I've ever seen nor something that really makes sense in the context of using EPS as a standardized metric across the market. Typically we take OUT non-recurring shit in EPS, we don't add it in. Adding something like this in would be much more appropriate to measuring the success of an acquisition/investing vehicle like a private equity fund, not a standalone operating company that reports operational earnings in addition to cash flow from investing. And as I suggest above, that's an analysis for which the IRR metric is more ideally situated.  And just a semantic thing - we typically wouldn't call the exit value a ""liquidation value"". That term is usually reserved for dissolution of a corporate entity and selling off its physical or intangible assets in piecemeal fashion (i.e. not accounting for operational synergies across the business). IPO value is actually just going to be a measure of market value of equity." "Massachusets does no such thing. The 5.25% tax is only on realized gains. ""Unearned"" means ""doesn't tie to your trade/business"", i.e.: is not gained through your personal performance." Without reading the source, from your description it seems that the author believes that this particular company was undervalued in the marketplace. It seems that investors were blinded by a small dividend, without considering the actual value of the company they were owners of. Remember that a shareholder has the right to their proportion of the company's net value, and that amount will be distributed both (a) in the form of dividends and (b) on liquidation of the company.  Theoretically, EPS is an indication of how much value an investor's single share has increased by in the year [of course this is not accurate, because accounting income does not directly correlate with company value increase, but it is a good indicator]. This means in this example that each share had a return of $10, of which the investors only received $1. The remainder sat in the company for further investment. Considering that liquidation may never happen, particularly within the time-frame that a particular investor wants to hold a share, some investors may undervalue share return that does not come in the form of a dividend. This may or may not be legitimate, because if the company reinvests its profits in poorer performing projects, the investors would have been better off getting the dividend immediately. However some value does need to be given to the non-dividend ownership of the company. It seems the author believes that investors failing to consider value of the non-dividend part of the corporation's shares in question led to an undervaluation of the company's shares in the market. Well like a lot of stuff on money.stackexchange there is not a simple answer, but generally it is not a good thing. Take a look at the wikipedia entry on Net Operating Loss. Basically the company is commenting that when they do make money they will receive preferential tax treatment on that income.    So whether or not this is a positive or a negative depends on a couple of things: NOL doesn't directly impact book value other than how the actual assets of the company changed over the previous quarter. I believe there is a 1:1 correspondence to how the assets change and NOL, but I am sure someone could clarify that for me in another answer or as a comment. If the company reported a loss at the previous quarter when the stock what at say $20/share, and now just before the company's next quarterly report, the stock trades around $10/share. There is a misunderstanding here, the company doesn't sell stock, they sell products (or services). Stock/share traded at equity market. Here is the illustration/chronology to give you better insight:   Now addressing the question What if the stock's price change? Let say, Its drop from $10 to $1 Is it affect XYZ revenue ? No why? because XYZ selling ads not their stocks the formula for revenue revenue = products (in this case: ads) * quantity the equation doesn't involve capital (stock's purchasing) The loss for B can be used to write off the gain for A.  You will fill out a schedule 3 with cost base and proceeds of disposition.  This will give you a $0 capital gain for the year and an amount of $5 (50% of the $10 loss) you can carry forward to offset future capital gains.  You can also file a T1-a and carry the losses back up to 3 years if you're so inclined.  It can't be used to offset other income (unless you die). Your C and D trades can't be on income account except for very unusual circumstances.  It's not generally acceptable to the CRA for you to use 2 separate accounting methods.  There are some intricacies but you should probably just use capital gains.   There is one caveat that if you do short sales of Canadian listed securities, they will be on income account unless you fill out form T-123 and elect to have them all treated as capital gains. I just remembered one wrinkle in carrying forward capital losses.  They don't reduce your capital gains anymore, but they reduce your taxable income.  This means your net income won't be reduced and any benefits that are calculated from that (line 236), will not get an increase. According to the gnucash guide, losses are recorded as negative transactions against Income:Capital Gains.  I've followed this model in the past when dealing with stocks and commodities.  If on the other hand, you're talking about an asset which could normally follow a depreciation schedule, you might want to look at the section in the business guide dealing with asset depreciation.