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Investment Concepts

NHR Update: Three Weeks After Costa’s Announcement, NHR’s True Expiration Date and New Tax Incentive Programs Emerge

NHR Update: Three Weeks After Costa’s Announcement, NHR’s True Expiration Date and New Tax Incentive Programs Emerge

by | Oct 30, 2023 |

Almost three weeks have passed since Prime Minister Acosta annou€nced during a television interview that the Non-Habitual Residence (NHR) Program would end for new applicants in 2024.  While existing beneficiaries of NHR can continue to avail themselves of their ten years of tax incentives under that program, the announcement alluded to an ending the program’s availability for new applicants was quickly approaching. While that announcement was naturally vague on the specifics and exact timing of when that door would shutter to new applicants, some details have since come to light, so we naturally thought it would be useful to provide our clients and those who follow our blog posts, podcasts and other media with a new update on this dramatic (and for many, traumatic) policy change affecting those preparing for and/or considering a move abroad to Portugal.

  • Important Dates to Know: December 31, 2023 and March 31, 2024.  Portugal’s government has prepared information concerning the 2024 fiscal budget, which includes proposed key deadlines for new NHR applications.  First, the initial application for NHR must be submitted by December 31, 2023. No applications for NHR status will be reviewed if they are submitted at any time in 2024 or thereafter.  Thereafter, those applications submitted on time (before the end of 2023) will need to have completed the approval process by March 31, 2024.  Because the approval process is largely out of the applicant’s hands and the process has traditionally taken several months, this is a potentially concerning deadline for those who are only able to complete their application for NHR towards the end of the window for applications closing on December 31.
  • The New “Incentivised Tax Scheme” (ITS): Portugal’s replacement program for NHR (???)  While there are very little details that have been made available as of today regarding what the ITS program will look like, those details that have been disclosed are absolutely subject to change as the policy remains on the Portuguese government’s proverbial drawing board. At the very least, we now know that there is likely to be a new  program of tax incentives that the government intends to put into place in 2024 as they phase out the NHR program. Again, very little is know for certain at this time, but it appears that the salient features of the new ITS program will include (1) a 20% flat tax on income from employment and self-employment, and (2) A fifty percent (50%) exemption on “professional income,” capped at €250,000 for the first five years of tax residency. 

As with the original NHR program, two prerequisites to applying for ITS have been discussed: (1) that the applicant first become a tax resident of Portugal, and (2) that the applicant cannot have been a tax resident of Portugal for any of the prior five years.

Much still remains unclear at this time. In fact, I’m not sure whether the five-year limitation applies both to employment and self-employment income as well, or if this applies only to professional income.” Moreover, I’m not sure if the exemption is capped at €250,000 or if the 50% exemption applies only to the first €250,000 of professional income. There is little doubt that these features could well look very different by the time questions like these are clarified with a finalized and codified ITS program. That 20% flat tax appears similar to certain features of NHR aimed to attract skilled labor from disearable vocations to come to Portugal to work. However, based on what’s been described about the new program, it appears to be limited to very specialized academic, scientific, R&D or very targeted and particular types of financial/investment expertise to help develop Portugal’s out-moded economy. It seems far more limited than the list of talents that qualified for the special flat tax under NHR.
The Changing Tax Landscape in PT:  What It Means For Pensioners, Digital Nomads, and Other Aspiring Expats. The most striking difference between the ITS and NHR schemes so far is the complete absence of any mention of incentives for pensioners. It seems ever more likely now that retirees looking for a tax-friendly European destination should gravitate towards the Greek and Italian programs loosely modeled upon NHR that apply directly to such retirees, France, where U.S. pensions (amongst other U.S.-source income) is protected from French income tax by treaty, or even countries further due East in the EU that simply have income tax rates that compare favorably to U.S. tax rates. After all, the U.S. federal income tax rates are the floor for U.S. expats, and any country with rates at or below those rates should have little to no effect on the aggregate income tax burden for American residents.  New target destinations may also become necessary for digital nomads as well as the scope and limitations thereof regarding ITS  become more clear as the new budget and incentives are negotiated and refined.

By: Stan Farmer

Cash Management Decisions for Expats

Cash Management Decisions for Expats

by | Sep 1, 2023 |

It is a (relatively) good problem to have: whether it is because of a bonus, diligent savings or unexpected windfall, you’ve accumulated extra cash reserves in your local currency.  The question then becomes how to handle these reserves.  While we can not answer every question related to cash management, we believe that there are two fundamental questions in order to help with these decisions.

 

-When do you need it?
-In what currency will you be spending it?

 

If the answer to the first question is “sometime in the future” then the best decision is to invest it in a diversified portfolio, which for most Americans abroad is best done in a US-based Brokerage Account as investing outside of the US presents all sorts of tax issues and compliance risks for Americans abroad (see https://usexpatinvesting.com/wp-content/uploads/2020/04/US-Expat-Investing-Guide.pdf podcast on PFICs).  If, however, the timeline is shorter (a car next year? A house in 2 years?)Americans abroad will want to take a closer look at their situation.

In  the previous few years, interest rates increased in the US slightly faster than those in the rest of the world, and as a result many Americans abroad were wondering whether they should invest these cash reserves in US bank accounts or other cash based savings vehicles (CDs, etc.) rather than those in their home countries. 

The first item to be aware of is that this introduces exchange rate risk into the equation in a way that does not affect clients who keep and spend their funds in the same currency. The possibility of currency risk in the near term should not be overlooked: according to statistics assembled from macrotrends.com (https://www.macrotrends.net/2548/euro-dollar-exchange-rate-historical-chart), on average the usd and euro pair have averaged a fluctuation (in either direction) of 7.5% per annum in the last ten years.  While such a fluctuation can prove valuable should the US dollar increase against the local currency (your funds are worth the higher interest rate PLUS your exchange rate gain), it can also mean any gains from that extra 1% you are earning are not only eliminated, but there is a significant chance you could lose money in your local currency.  

 

However, good news is that in 2023, interest rates have moved up in most of the rest of the world.  For example, The ECB (European Central Bank), has in the last year increased its interest rates from approximately 0.0% to 4.25% (https://tradingeconomics.com/euro-area/interest-rate) a move which has made interest rates in Europe much more competitive overall (similar moves have also taken place in the UK and elsewhere around the world).  Consequently, Americans abroad might want to take a closer look at offerings like CDs or high yield savings accounts from their local bank, or investigate purchasing government bonds (especially if they live in a generally safe large economy).   

 

While Americans abroad will likely have to pay tax on these interest earnings in the US (or use tax credits because they paid tax on the earnings in their local country), these items will not have any PFIC reporting requirements.  Additionally, investors should be aware that the standard protections that many Americans assume for their US banking relationships (for example, FDIC insurance) may not exist in their country of residence.

 

Ultimately, this brief article cannot eliminate the chance you will lose money or make the best decision for your individual situation, it should highlight the significant questions you should ask yourself before deciding how to allocate cash reserves as an American abroad.

By: Keith Ponieważ

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.

 

 

 

 

Court Cases that Impact Expats with Mishkin Santa

Court Cases that Impact Expats with Mishkin Santa

by | Jul 12, 2023 |

Gimme Some Truth Podcast with The Wolf Group

 

 

 

 

This week on Gimme Some Truth for Expats, our expat advisors Syl Michelin and Stan Farmer were joined by special guest Mishkin Santa, a partner of the DC-based international accounting firm The Wolf Group to discuss recent IRS court cases that would be of particular interest to U.S. expats.  For the past forty years, The Wolf Group has been at the forefront of representing and advising U.S. expats and U.S. and international organizations (including the U.S. State Department and the International Monetary Fund) on a myriad of U.S. tax issues, including a leading role in representing Americans going through Offshore Voluntary Disclosure (OVD). Streamlined Offshore Voluntary Disclosure (SOVD), and other streamlined compliance procedures that encourage expats with unreported, underreported and/or undisclosed foreign income or assets to come forward, come clean and get compliant with their tax reporting and payment obligations. On the podcast, Mr. Santa spent thirty minutes with us and provided a great deal of useful information and lessons for expats that can be gleaned from five important cases.

 

 

 

 

 

 

Rather than reiterate all of Mr. Santa’s insights, which can be gained simply by listening to the podcast or watching it on our YouTube channel, below is simply a short appendix of the cases discussed during the discussion:

 

 

 

 

Farhy v. Commissioner
In a recent Tax Court win for expat filers that own or have ownership stakes in foreign companies, the U.S. Tax Court ruled that the IRS lacks the authority to assess the $10,000 penalty for failing to file, or provide a complete and accurate filing, of Form 5471, which requires a very thorough and complete accounting (books, records, revenues, profits, etc.) on the taxpayer’s foreign company.  To enforce such penalties going forward, the IRS would need to get the Justice Department to institute a case against the taxpayer and sign off on the $10,000 penalty (which Mr. Santa described as “unlikely”). The IRS on its own accord can no longer assess these penalties on its own accord.

 

 

 

 

Bittner v. United States 
Along similar lines, the IRS has historically issued $10,000 penalties at a torrid pace against taxpayers that fail to file, or file complete FBAR disclosures (FINCEN Form 114) regarding foreign bank accounts. Often, the IRS would aggressively issue separate $10,000 penalties for each account that was not properly disclosed on the FBAR – in some cases issuing fines that exceeded the taxpayer’s total balance of reportable accounts! Bittner fought this practice all the way to the U.S. Supreme Court and ultimately prevailed in a 5-4 decision and a plurality opinion issued by the highest court in the land.  Another victory for expats against heavy-handed fines and penalties.

 

 

 

 

United States v. Schwarzbaum
If expats have ever questioned whether the IRS had reach beyond the border to seize assets in order to enforce payment of federal taxes due, this case erases much of the doubt as to the broad international reach of Uncle Sam.  When taxes go unpaid, the IRS has mechanisms to, with the cooperation of foreign governments, get payment from foreign financial accounts and property owned by the delinquent taxpayer. These international mechanisms are known as “repatriation orders” and the defendant in this case was unsuccessful in his challenges to resist such orders. There are, in fact, other mechanisms available to the IRS as well, including Interpol Red Cards, where foreign law enforcement officials may hold a tax fugitive while awaiting extradition orders to return the evading taxpayer to U.S. federal authorities. Moreover, the “FAST Act” gives the IRS the ability to have U.S. immigration seize the passport or VISA of any taxpayer who owes $50,000 or more in taxes and have the individual detained from leaving. 

 

 

 

 

United States v. Gyetvay
In this case, Mark Anthony Gyetvay, a CPA who lived in Naples, Florida and who at one time was the CFO of a large Russian natural gas company, opened up a couple of Swiss bank accounts and then had the ownership transferred to his Russian spouse. Mr. Gyetvay not only failed to disclose his control over these foreign accounts (with balances of around $93 million), he also failed to file taxes for two tax years (2013 and 2014)! Later, Mr. Gyetvay tried to take advantage of the IRS’s offshore streamlined compliance procedures to clean the proverbial slate with the IRS, but his filings were in fact incomplete and inaccurate. Mr. Gyetvay was convicted on multiple counts and faces potential sentencing in September of up to 5 years in prison for failing to file an FBAR, five years for making false statements to the IRS, one year for each failure to file a tax return. Mr. Santa sees this case as a cautionary tale to those who believe the IRS does not thoroughly scrutinize such streamlined filings and that these procedures can allow an easy path to skate freely into IRS amnesty – in reality, these filings should be done with the utmost honesty, transparency and competency with the professional help of the most experienced legal and tax professionals! As the IRS showed Mark Anthony Gyetvay, don’t try Putin one over on the IRS!

 

 

 

 

As you can see, it was a very informative and useful podcast, and we hope to bring Mr. Santa back to our channel for more practical and informative discussions in the future.

By: Stan Farmer

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.

 

 

 

 

https://open.spotify.com/show/3aRfyxqUrcrcztaAr4Qpft

 

 

Wind of Change – Will Portugal’s Struggle with its NHR Program’s Success Lead to Immigration Reform?

Wind of Change – Will Portugal’s Struggle with its NHR Program’s Success Lead to Immigration Reform?

by | Jun 6, 2023 |

Intro to Changes in Portugal

Heading into 2023, U.S. (and non-U.S.) expat immigration to Portugal was on an absolute tear.  Over the past several years, Portugal has morphed from a popular choice for British retirees (pensioners) to retire and live in or near the southern coastal region of the Algarve into a country whose resort and urban areas have all been infiltrated by a massive influx of foreign immigrants, both working and retired.  Portugal has indeed become a hotbed for U.S. expats and immigrants from elsewhere in the EU and beyond that wish to enjoy one of the best climates in the world. But how sustainable will this trend prove to be?

Post-Great Recession Reforms Ring in A New Era of Programs to Attract Expats 

A key driver of Portugal’s newfound popularity as an American expat destination were tax and legal reforms over the past decade.  First, the non-habitual residence (NHR) program was enacted to entice immigration of wealthier foreigners and foreigners with specialized, attractive professional skills. The upshot of NHR was that most non-Portuguese-source income became sheltered from Portugal’s personal income tax for the first ten years of residency in Portugal and wage earners in select vocational segments would pay only a twenty percent flat tax on their Portuguese-source earned income during that ten-year NHR period.

Other policies encouraging this immigration effort included the abolishment of gift and inheritance taxes (making Portugal a more comfortable place to not just live, but also die) and the legal recognition of fiduciary entities, such as trusts, that were before unknown to the Portuguese civil law legal system. For wealthier foreigners looking for an “easier” path to Portuguese (and, therefore, EU) citizenship, the Golden Visa program also emerged. With a considerable monetary investment in Portugal-based pooled investments (mutual funds or private equity funds) OR the direct purchase of real estate in Portugal, such as a new primary residence, the Golden Visa would be offered to clear the immediate path to legal residency in Portugal and, thereafter, the ability to become a Portuguese citizen as well.

Beyond financial and immigration incentives, Portugal’s popularity for expats could also be widely attributed to the country’s low relative cost of living and access to quality healthcare.  Home prices and rental costs have been considered a bargain in comparison to those in neighboring countries in Western Europe, and routine healthcare services have been considered to be a relative bargain as well. On the downside, at least for expats looking to join the local workforce, wages and salaries in Portugal were also considered to be relatively low compared to other Western European countries. However, for digital nomads and other consultants and employees of foreign companies that tolerated or encouraged remote work, it remained possible to enjoy Portugal’s lower cost of living without having to endure the corresponding lower incomes that came with the territory. This mobility trend naturally accelerated during and in the aftermath of the global COVID-19 pandemic.

Signs of an Overheated Market:  Too Much Of A Good Thing?

But favorable legal and financial policies and favorable climate and demographic conditions can neither evade nor shelter Portugal and its residents from the inevitable market forces of supply and demand, nor from a global bout of post-pandemic inflation. The population explosion of immigrants to Portugal has driven up housing prices and rents for expats and Portuguese locals alike. Just as the explosion of tech-company-driven wealth and massive influxes of employees to Silicon Valley displaced many San Francisco area locals from their traditional neighborhoods, Portugal’s locals in Lisbon, it’s coastal neighboring community of Cascais, Porto, the Algarve and other areas are finding it difficult to maintain their homes in their communities as more and more expats compete to own and rent properties in their neighborhoods. These problems have only intensified over the past year, with record numbers of Americans immigrating to Portugal, rising prices for goods and services (no doubt including the costs to rehabilitate older properties and construct new ones), and rising interest rates.

Given these challenges created by the success of these decade-long policies, it should come as very little surprise that the political and governmental climate has begun to shift to finding new ways to curb the influx of expats and slow the inflationary pressures that are a direct byproduct of the surge of expats to Portugal. For one, the Portuguese border and immigration service, known as SEF, has from time to time made it more difficult to obtain the in-person appointments necessary to obtain or renew residence permits. This has been a source of frustration for existing and would-be residents of Portugal alike.

Changes to the Golden Visa program have resulted in more direct efforts to ebb the flow of American dollars in Portugal’s overheated real estate markets.  First, changes were made recently so that direct purchases of residential real estate would no longer satisfy the investment requirements for the program in key property markets, including Cascais, Lisbon, Porto and the Algarve.  However, investment requirements could still be made through direct real estate purchase in other areas and through indirect real estate investment via Portuguese investment funds. However, the ultimate reform to curb immigration through the Golden Visa program will soon take center stage in the Portuguese Assembly (legislature):  the outright termination of the Golden Visa program!

In February of this year, the current coalition government in Portugal made a proposal to abolish the issuance of Golden Visas. This represents an unfortunate, but understandable, policy and attitudinal shift away from policies that sought as much immigration from affluent foreigners as the country could absorb. By “understandable,” it seems logical that, in the face of a very bubbly real estate environment where the costs of living are spiraling higher, Portugal may logically decide that they are at, or close, to the point of maximum expat absorption. 

Moving Forward: Is Portugal Still a Great Option for Expats?

As of the time of this writing in early June, 2023, the Golden Visa program continues, though perhaps on its last legs. The program could be terminated by the federal legislature as soon as mid-June of this year, but we’ll have to wait and see when the proposal is voted on. The government has signaled that any and all Golden Visa applications that are submitted before the program is terminated by legislation will be honored and processed. Accordingly, if your application is in, don’t panic.  If you are thinking about making an application, perhaps professional assistance from a consulting firm that assists would-be expats through the process may be needed as time is likely running out very quickly. However, if my experience living abroad, including in Portugal, has taught me anything, it is that European bureaucracy moves at its own, deathly slow pace.  Therefore, it may already be time to start looking for avenues other than the Golden Visa program if you wish to move abroad to Portugal, just in case the Golden Visa program is abolished in the near future.

Keep in mind that the Golden Visa option, under Article 90A of Portugal’s immigration laws, is only one of several legal avenues to obtain residency, and eventually citizenship (if desired), in Portugal. The general residence program is governed by Article 77 and is most often the process that expat retirees or employed expats have used to immigrate to Portugal. As we are not immigration experts, nor consultants that assist in the immigration process, this is far from an comprehensive discussion of Portuguese immigration, but generally the important steps include showing that you have an income stream to sustain your costs of living, have arranged for a place to live in Portugal (owner’s deed or rental agreement), health insurance or eligibility determination for national health insurance, etc. This is commonly known as the D7 visa for Portugal, and it still allows a pathway to Portuguese citizenship after five years of residency. There is also a one-year temporary or two-year residence visa for self-employed and freelancers known as the D8 or “Digital Nomad” visa program. For those looking to start up a business in Portugal, there is the alternative option of Article 89 for Entrepreneurs. Expats who have been living in another EU country may be able to avail themselves of the residence programs for long-term EU residents (Article 116) or EU residents holding the EU blue card with “highly qualified” professional activities (Article 121-B, 121-K).

Conclusion – Portugal Filling Up But Still Attractive, Other Countries Are Ready to Compete

The main point here is that the Portugal government is responding to growing concerns of its citizens concerning the spiraling inflation in key housing markets in the country by proposing the removal of the Golden Visa program. This is a step that should directly reduce some future demand in those markets, but this does not close the door to Portuguese immigration by expats looking to enjoy the benefits of the NHR program. Only time will tell if there are more restrictions to come from immigration or tax  policies. If you are in the latter stages of planning, it makes sense to proceed according to plan.

However, if you are still “shopping” for a European expat destination, there are other attractive options that may provide significant bang for the buck so to speak. Italy and Greece have entered the competition for affluent expats with programs quite similar to Portugal’s NHR. You can learn more about those programs and how they compare to NHR HERE. And it is always important to remember that, as a U.S. citizen or long-term resident, your U.S. federal income, estate and gift tax obligations follow you wherever you choose to go.  Accordingly, U.S. income tax rates are the “floor,” meaning that your total income tax obligations, even with foreign tax credits, will not fall below your U.S. federal income tax obligations. In the majority of the EU countries, U.S. expat residents will find a new “ceiling” for income taxes, meaning that the net resident country and U.S. income tax bill will exceed what your U.S. federal income tax alone would total. However, if you move further East within the EU, you may find certain EU member nations with extremely attractive tax rates that keep your net tax obligations at that floor. You can learn more about those tax-attractive options HERE.

France is also an attractive option for American expats because of the exceptionally favorable terms of our tax treaty with our revolutionary allies. You can learn more about these attractive features HERE.  While Portugal struggles with how to deal with its own expat success, there are many attractive routes to Europe. You might even say that

The future’s in the air, I can feel it everywhere

I’m blowing with the wind of change

And remember, unlike retiring in Florida, there are no European equivalent  storms to “rock you like a hurricane.”  (LOL)

Stan Farmer, CFP®

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.



Napoleon vs Your Wealth: What Expats in Europe Need to Know About EU Directive 650/2012

Napoleon vs Your Wealth: What Expats in Europe Need to Know About EU Directive 650/2012

by | Apr 28, 2023 | ,

In Europe, succession planning can be a very different concept than what Americans are used to at home. In the U.S., we are almost entirely free to dispose of our estates as we please. This includes the ability to transfer everything to a friend, a trust, or to a charity upon death. In European countries apply a range of forced heirship rules, aimed at protecting specific heirs (usually children and blood relatives). 

 

 

 

These restrictions create difficult estate planning situations for Americans in Europe. For example, a married U.S. couple living in France may want the surviving spouse to inherit the entire estate of a deceased husband or wife. They will find that convoluted heirship rules, derived from early 19th century Napoleonic reforms, require that their children receive a portion of the wealth.

 

 

 

 

 

These laws are not limited to France, and most countries in Europe will apply some form of forced heirship requirement. A relatively recent piece of EU regulation, directive 650/2012 (1), gives foreign nationals greater flexibility in disposing of their estate. 

 

 

 

In a nutshell, EU Directive 650/2012 allows foreign citizens (say, an American living in Europe) to select the law of their country of citizenship in matters of succession, as opposed to local succession laws which would otherwise apply by default. For example, the previously mentioned American couple in France may have been able to transfer their wealth between spouses if they had made an election of U.S. law under 650/2012, and thereby opted for more flexible U.S. succession rules as opposed to more rigid French law. 

 

 

As all things having to do with cross border estate planning, the application of this directive is a complex matter. In most cases it will require seeking advice from local experts.

 

 

 

The following bullet points will highlights a few key details to be aware of:

 

 

    • The election is not a choice of probate location: many EU countries do not have a concept of probate comparable to the U.S. It is important to note that even if U.S. law is selected, whatever administrative proceeding might be applicable has to be followed locally.

 

 

    • The election is tax neutral: regardless of your choice of succession law, local inheritance/estate or gift tax will still apply.

 

 

    • Some countries opted out: The UK (pre-brexit), Ireland and Denmark have opted out of the directive (2).

 

 

    • There may be alternatives: there may be solutions available under local law to circumvent forced heirship without resorting to 650/2012, these will usually involve either a specific election of matrimonial regime, or a marriage contract.

 

 

    • Some practitioners may advise against it: Some estate planning practitioners still consider the directive to be relatively new and untested, and feel that it may add unnecessary complexity. Be sure to consult a local expert to understand all required formalities, procedures and consider alternatives.

 

 

 

Please reach out to our team to discuss your specific circumstances!

 

 

By: Syl Michelin

 

 

 

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.