zero cost for received gifts

[Daniel Clemente]

Hi, I saw the development in branch zero_cost:

+2015-04-13
+
+ - Beancount now allows the cost to the set to zero. This is useful for stock
+ options that one receives from an employer that have no value attached to
+ them.


How does this change the example we once discussed?:
- I proposed initially: I receive 1 BIKE as a gift („BIKE“ is a currency), and account it at cost $0 (because I didn't pay for it). If later I sell it for $80, I earn $80.
- Then we agreed on: I receive 1 BIKE as a gift, and I feel it's worth $50 to me, so I write cost $50 (the market price is not relevant in this transaction). If later I sell it for $80, I earn $30.

In both cases it's a gift, and it has no cost attached (people always remove the price tag to gifts!). The difference is whether you sentimentally value the gift at $0 or $1 or $100 … Just like „options“: you can decide to value them $0, but others could value them higher.


In my ledger I have been using a small number (0.00142857 EUR) as cost of some gifts (e.g. dividends paids in shares) when I'm not sure about the market price at the time (or when there's no market). It isn't value 0 to me, but the cost is 0. Should I account it at cost 0 now that it's allowed, or should I keep looking for a real market price?.
When I export values to graph them, I always exclude those low values so that the price graph doesn't plunge and soar.



By the way, I found a better solution than 0.00142857 EUR or 0 EUR, but I feel it's a hack and I don't know whether it's supposed to work. Instead of writing:

2011-01-01 ! "I was given 8 shares as dividend"
Assets:Stocks:SAN 8 SAN {0.00142857 EUR}
Income:Dividend:SAN

I would write:

2011-01-01 ! "I was given 8 shares as dividend"
Assets:Stocks:SAN 8 SAN {1 SAN}
Income:Dividend:SAN

Beautiful, isn't it? I received 8 SAN shares, each one of them costing… 1 SAN, of course. I'm glad this parses and works correctly!
The difference between {0.00142857 EUR} and {1 SAN} is visible in the unrealized earnings: {0.00142857 EUR} will report higher earnings. {1 SAN} seems to take the *current* price (not the price at that date) and seems to be affected by the „price“ command, therefore it's too unstable to be used for serious accounting. Maybe you want to forbid this hack :-)


Greetings

[Martin Blais]

On Fri, Apr 17, 2015 at 10:50 AM, Daniel Clemente <n14...@gmail.com> wrote:

  Hi, I saw the development in branch zero_cost:

+2015-04-13
+
+  - Beancount now allows the cost to the set to zero. This is useful for stock
+    options that one receives from an employer that have no value attached to
+    them.


  How does this change the example we once discussed?:
- I proposed initially: I receive 1 BIKE as a gift („BIKE“ is a currency), and account it at cost $0 (because I didn't pay for it). If later I sell it for $80, I earn $80.
- Then we agreed on: I receive 1 BIKE as a gift, and I feel it's worth $50 to me, so I write cost $50 (the market price is not relevant in this transaction). If later I sell it for $80, I earn $30.

I don't remember the example, but if you want to set a cost basis of zero, you may do that.

In fact, because you paid nothing for it, you probably should.

  In both cases it's a gift, and it has no cost attached (people always remove the price tag to gifts!). The difference is whether you sentimentally value the gift at $0 or $1 or $100 … Just like „options“: you can decide to value them $0, but others could value them higher.

I disagree with your characterization of the cost basis. It's not "sentimental" in any way. The cost basis is what you paid for an asset. You should set the cost basis according to your usage of it. That is, if it's for tax reporting, you should set it according to the govt's own rules for marking.

Also, about options: it's not as arbitrary as you imply, there is a market for them, and pricing them too far off market - however you "feel" about it - is simply wrong. Marking your assets should never be done on a "sentimental" basis, it should be based off of some rationale with external inputs (e.g. the market, or other correlated markets, or some theoretical basis like Black-Scholes with some reasonable esimation on the volatility).

  In my ledger I have been using a small number (0.00142857 EUR) as cost of some gifts (e.g. dividends paids in shares) when I'm not sure about the market price at the time (or when there's no market). It isn't value 0 to me, but the cost is 0. Should I account it at cost 0 now that it's allowed, or should I keep looking for a real market price?.

Account for them at zero if that's what your tax reporting rules command.

 

  When I export values to graph them, I always exclude those low values so that the price graph doesn't plunge and soar.

  By the way, I found a better solution than 0.00142857 EUR or 0 EUR, but I feel it's a hack and I don't know whether it's supposed to work. Instead of writing:

2011-01-01 ! "I was given 8 shares as dividend"
  Assets:Stocks:SAN  8 SAN {0.00142857 EUR}
  Income:Dividend:SAN

  I would write:

2011-01-01 ! "I was given 8 shares as dividend"
  Assets:Stocks:SAN  8 SAN {1 SAN}
  Income:Dividend:SAN

  Beautiful, isn't it? I received 8 SAN shares, each one of them costing… 1 SAN, of course. I'm glad this parses and works correctly!

Hmmm it shouldn't. I thought I added a check against this.

I'll revisit, this probably shouldn't be allowed as valid input.

With zero cost support, you should be fine, right?

 

  The difference between {0.00142857 EUR} and {1 SAN} is visible in the unrealized earnings: {0.00142857 EUR} will report higher earnings. {1 SAN} seems to take the *current* price (not the price at that date) and seems to be affected by the „price“ command, therefore it's too unstable to be used for serious accounting. Maybe you want to forbid this hack :-)

You got it :-)

Thanks Daniel,

 

  Greetings

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[Daniel Clemente]

El Fri, 17 Apr 2015 11:31:12 -0400 Martin Blais va escriure:

>
>   In both cases it's a gift, and it has no cost attached (people always remove the price tag to gifts!). The difference is
> whether you sentimentally value the gift at $0 or $1 or $100 … Just like „options“: you can decide to value them $0, but others
> could value them higher.
>
> I disagree with your characterization of the cost basis. It's not "sentimental" in any way. The cost basis is what you paid for an
> asset. You should set the cost basis according to your usage of it. That is, if it's for tax reporting, you should set it according
> to the govt's own rules for marking.
>

That's true, accounting should be adapted to each case, I will keep this as a rule. My personal accounting is simple, while the one for the taxes requires all crazy things (like cost basis adjustments).

> The cost basis is what you paid for an asset.
>

True but in a flexible way; it cannot be taken literally but must be adapted to each usage, as you said. E.g. I literally „paid $200 for some shares“, but if I'm reporting taxes, I might have to say that the cost basis is $180, which is not what I paid, but it's what the government mandates due to cost basis adjustments.

> I disagree with your characterization of the cost basis. It's not "sentimental" in any way. The cost basis is what you paid for an
> asset.
>

I was wrong, I was referring to „price“ but I mixed it with „cost basis“ (and I was still thinking in a third one, „value“). Now I understand it like this: a $10 book and a $10 book might have the same „initial price“ (that's cost basis, I think) but one of them can be very valuable to you and you wouldn't sell it even for $100. You could write in beancount that its price is some particular high number… and this wouldn't change its „cost basis“, which still would be $10. But the „price“ is just sentimental (e.g. the price you write in a buy/sell order in a market depends on your expectations only); a more „objective“ price will be determined later when a buyer and seller do a transaction.

> Also, about options: it's not as arbitrary as you imply, there is a market for them, and pricing them too far off market - however
> you "feel" about it - is simply wrong. Marking your assets should never be done on a "sentimental" basis, it should be based off of
> some rationale with external inputs (e.g. the market, or other correlated markets, or some theoretical basis like Black-Scholes with
> some reasonable esimation on the volatility).
>

But then, when does your example case happen? — „stock options that have no value attached to them“. Is this because there's no market? Shouldn't be they valued at >0 anyway? (If there were a market, the price would be >0).



I'll use cost 0 for gifts and see what happens.


Thanks.

[Martin Blais]

On Fri, Apr 17, 2015 at 2:16 PM, Daniel Clemente <n14...@gmail.com> wrote:

El Fri, 17 Apr 2015 11:31:12 -0400 Martin Blais va escriure:

> Also, about options: it's not as arbitrary as you imply, there is a market for them, and pricing them too far off market - however
> you "feel" about it - is simply wrong. Marking your assets should never be done on a "sentimental" basis, it should be based off of
> some rationale with external inputs (e.g. the market, or other correlated markets, or some theoretical basis like Black-Scholes with
> some reasonable esimation on the volatility).
>

  But then, when does your example case happen? — „stock options that have no value attached to them“. Is this because there's no market? Shouldn't be they valued at >0 anyway? (If there were a market, the price would be >0).

It happens if you paid nothing for the options and they weren't recognized as having a cost basis. If they were essentially gifted to you.

You're confused about terminology IMO. The entire discussion can be simplified if you accept that THERE IS NO PRICE. This is a bridge in understanding that traders make early on in their career and that most people live their entire life without even considering (if you found yourself dumbfounded by the preceding statement in caps, read it again think about it some more). And I mean this in a very general way, there really is no "price" for anything anywhere at any time. Stop using the word PRICE, it's throwing you off. There are only bids and offers, and for particular quantities. This is true for stocks, for options, for the coke can in the machine in the office, for your electrical bill, etc. For everything.

What is the cost basis of an option? It's what you paid for it (+/- adjustments later on if they even occur, but this is a detail, the cost basis is the amount that you paid for the position that you can deduct from the proceeds for the purpose of paying your taxes).

What is the value of an option? Well it depends, but you can assign a value to it (a process called "marking") for the purpose of evaluating a portfolio of assets. That value is "the mark". If it's for your own valuation of a portfolio, you choose it. But the rationale for choosing is for the most part _not_ an entirely arbitrary decision. There are bases upon which you can rest to estimate the value of assets. It's not a sentiment.  

[Daniel Clemente]

El Fri, 17 Apr 2015 15:31:23 -0400 Martin Blais va escriure:

>
>   But then, when does your example case happen? — „stock options that have no value attached to them“. Is this because there's
> no market? Shouldn't be they valued at >0 anyway? (If there were a market, the price would be >0).
>
> It happens if you paid nothing for the options and they weren't recognized as having a cost basis. If they were essentially gifted
> to you.

They cost you $0. If they are sold for $2 next year, how much would it be the return? (e.g. the one calculated in returns.py). From 0 to 2 it's not 200%, it's more like infinite.

>
> You're confused about terminology IMO. The entire discussion can be simplified if you accept that THERE IS NO PRICE. This is a
> bridge in understanding that traders make early on in their career and that most people live their entire life without even
> considering (if you found yourself dumbfounded by the preceding statement in caps, read it again think about it some more). And I
> mean this in a very general way, there really is no "price" for anything anywhere at any time. Stop using the word PRICE, it's
> throwing you off. There are only bids and offers, and for particular quantities. This is true for stocks, for options, for the coke
> can in the machine in the office, for your electrical bill, etc. For everything.
>

I know about bid+offer, and yes it's useful to forget about the unneeded concept „price“. Trading is a good way to learn this. I agree there's no „price“, but there are similar concepts (like: midle price between offer price and bid price)

In an electricity bill they're doing an *offer* to settle it for 250 units of $, and you *bid* 250 units of $ to settle it (and they won't accept lower bids). That's commonly and unambiguously called „price“, is that right?. I don't know whether this is theoretically possible (e.g. is the offerer really getting $250 or a bit less, and is the bidder paying $250 or a bit more).
Anyway, this is already too theoretical…

> What is the cost basis of an option? It's what you paid for it (+/- adjustments later on if they even occur, but this is a detail,
> the cost basis is the amount that you paid for the position that you can deduct from the proceeds for the purpose of paying your
> taxes).
>
> What is the value of an option? Well it depends, but you can assign a value to it (a process called "marking") for the purpose of
> evaluating a portfolio of assets. That value is "the mark". If it's for your own valuation of a portfolio, you choose it. But the
> rationale for choosing is for the most part _not_ an entirely arbitrary decision. There are bases upon which you can rest to
> estimate the value of assets. It's not a sentiment.  
>

I wanted to comment on this but I realized that I know very little about theories of value or about „marking“, so I don't really understand what my words mean. Some articles about „mark-to-market accounting“ seem a very interesting read if I had the time.
Thanks for introducing these topics.

I was looking for a possible glossary in beancount's documentation to check whether those definitions you sent are already written there. It would be interesting to see the beancount way to write cost basis / value / price / bid / offer / mark. But this is not really important or urgent anyway. Maybe I should do it myself to learn about it, but that will take time too.