Photo by: thetaxhaven

Warren Buffett may be a fan of higher personal income taxes on the ultra-wealthy, but when it comes to Berkshire Hathaway (BRK.A -0.10%)(BRK.B -0.09%), he's all about tax avoidance.

On Berkshire's balance sheet, you'll find $49.5 billion in deferred income taxes -- taxes that Berkshire Hathaway hasn't yet paid. In fact, in all but one year in the last 10 years, Berkshire Hathaway's deferred taxes have gone up.

How can Berkshire Hathaway -- a company with the ninth-highest revenues in the world -- get away with avoiding so much in taxes?

It's actually quite simple.

Holding forever pays off
Buffett famously says his favorite holding period for a stock is "forever." That quote has circulated everywhere, and it's been used to justify everything from his investing principles to his thirst for Cherry Coke.

When Buffett talks about buy-and-hold investing, he's not just talking about the power of investing over long periods of time. He's talking about a wonderfully tax-savvy investment philosophy.

Buffett's likes to buy-and-hold because it allows him to avoid paying taxes on his investment returns.

Because you pay capital gains taxes only when you sell, never selling can save you a fortune on your taxes.

Of course, you might be thinking that Berkshire Hathaway will eventually owe taxes on those gains. And it will. Eventually. But for the indefinite period of time in between, Buffett saves a fortune -- and compounds his money faster -- by delaying his tax bill.

How this strategy affects you
Berkshire Hathaway's taxes are a little different than your personal taxes. So let's stick to what affects you -- capital gains.

If you're like many investors, you'll pay a 15% capital-gains tax on your taxable investments. Over time, capital-gains taxes can significantly reduce your returns. So how about an example?

Let's assume that we live in a simple place where there are only two stocks. Each returns 10% per year, year after year.

You invest $10,000 into one of the stocks and hold for 40 years. After that time, you sell it for $401,447. You then pay 15% on the capital gains and receive $351,230 post-tax. Not too shabby! Buy and hold certainly paid off.

Now, what if you were an indecisive investor? What if you flip-flopped between stocks every year, selling stock A to buy stock B, and vice versa?

Because you cashed in your gains each year to buy a different stock, you'll pay capital-gains every single year. All that taxation adds up so that by the end of 40 years, you'd only have $283,543 post-tax. That's no small sum, but it's not the $351,230 you'd have if you weren't so indecisive. You cost yourself more than $67,000 in potential profits!

That's how, and why, Buffett pushes off his tax bill. By buying and holding for very long periods of time, Buffett can avoid billions in taxes. The good news is that you can do it, too.