Taking a look at Berkshire's 10k for year ended 2021.
- Dividend and investment income is revenue, and fortunately they don't pay a dividend which would mean taxation 3 times. e.g. Apple earns income, pays tax on that (1), Apple pays dividend to Berkshire which they report as income and they pay tax on that (2) and if Berkshire paid a dividend, the investor would have to pay tax on that (3).
- Investment gains (appreciation in the fair value of equity investments) is counted into income. That means they're paying tax on what would be unrealized gains every year.
- Without (1) and (2), they would have only paid tax on about 25bn in 2021, but instead they're paying tax on 111bn. Their income tax expense was almost 21bn.
They've underperformed SP500 going back 5 years, despite investing in AAPL which has gone up almost 300% in the past 5 years (5x Berkshire's return), and they own more than 5% of AAPL, and it is almost 50% of their equity investments. Their equity investments total 356bn which is 56% of their market cap.
They make anywhere from 20bn – 40bn excluding equity investment gains, but a lot of it is eaten up in income tax.
Wouldn't Berkshire generate more value for shareholders by getting rid of their equity investments completely, and using that 356bn to buy back shares from their own shareholders as well as pay out dividends.
It seems more tax-optimal for Berkshire holders to invest in the equity investments themselves because even if Berkshire's equity investments do extremely well, there's a massive tax drag. Imagine if you had to pay taxes on your unrealized gains every year.
Feel free to poke holes in my interpretation.
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