Hedge fund managers were able to defer taxes, until this year
If you've seen the movie The Big Short, there was one character they left one. He was probably the biggest character of all because he made more than anyone by betting against US housing.
John Paulson made an enormous bet against subprime mortgages ahead of last decade's financial crisis, earning about $15 billion of profits for his funds and approximately $4 billion for himself. It's detailed in the book "The greatest trade ever" by Gregory Zuckerman.
One thing that book doesn't detail is the taxes. The tax code at the time allowed deferrals of the taxes due on the gain but only until April 15 this year. Now, he has to pay a bill estimated at $1.5 billion, according to the WSJ.
The drop compounds a problem for Paulson. In this past three years, his firm lost 3.14%, 27.3% and 20.27%.
Other fund managers including Stevie Cohen, David Einhorn and Daniel Loeb all face bills of more than $100 million and the total for all of them could be between $25 billion and $100 billion.
A fresh loophole may allow them to donate to charities to get a 100% deduction and those charitable trusts can even invest back in their funds.
There's also this problem:
"Paying the tax bill may itself be something of a chore for Mr. Paulson. He could wire the money but may wish to pay by check if he'll earn interest on the money until tax authorities cash the check. If so, the IRS only accepts checks or money orders of less than $100 million. He could submit multiple payments, though tax attorneys note that clients can have problems fitting such huge numbers onto the line on a check."
At a 2% annualized rate, a one-week delay on cashing the $1.5 billion would be worth almost $58,000.
Here is a good article from 2007 where Paulson talks about his subprime bet at the time.
