By Carol J. Loomis
February 24, 2018

At 8:00 EST this morning — just a few moments ago — Berkshire Hathaway did what it always does on the last Saturday of February: it released both its financial results for the year just ended and CEO Warren Buffett’s annual, widely-anticipated letter to shareholders.

Here is what Berkshire’s shareholders next learned: First, Berkshire had a rich but odd year. Second, Buffett regarded it with mixed feelings.

Start with the numbers: The company’s gain in net worth, the metric Buffett has forever used for Berkshire, was an impressive $65.3 billion. On a per-share basis, that was a book value gain of 23%, the best result in almost 20 years. The 23% also nicely beat out the 19.1% average for Buffett’s 53 years of running the company.

Proceed to Buffett’s appraisal of what happened. The $65 billion is “real,”he wrote: “Rest assured of that.” But, he disclosed with obvious regret, only $36 billion of that total came from Berkshire’s operations. The remaining $29 billion, he explained, “was delivered to us in December when Congress rewrote the U.S. Tax Code.”

The Congressional event of which Buffett speaks was the much-debated Tax Cuts and Jobs Act of 2017, signed into law on Dec. 22. And just how did TCJA, as Berkshire abbreviates it, do so much for the company?

A footnote in Berkshire’s 10-K filing with the Securities & Exchange Commission reveals the full answer, spelling out a string of positive and negative tax items that, if nothing else, prove just how complex TCJA is. But the biggest contributor to the $29 billion windfall, by far, was Berkshire’s huge unrealized gains on stocks (a net figure of more than $100 billion at yearend) and a tax item that goes with them.

To explain: On Berkshire’s financial statements, unrealized gains and losses become a part of “Investments in equity securities,” a marked-to-market item on the asset side of the balance sheet. Concurrently, the liability side of the balance sheet shows a figure for “deferred income taxes,” which is essentially Berkshire’s estimate of the tax bill were it to sell all of the stocks in which it has gains or losses. Hello, Coca-Cola, American Express, Apple, and Wells Fargo! Imagine those stocks—and many others—hitting the market in one wild and manic day.

Before TCJA came along in December, Berkshire was estimating taxes at the corporate rate of 35%. But the new law reduced that rate to 21%. Berkshire therefore cut its deferred income taxes item by $35.6 billion, and that amount went into profits. Some $6.6 billion of that gain meanwhile got eaten up by tax items that went the other way—and that’s how TCJA managed to contribute $29 billion to Berkshire’s gains for the year.

Strange, but true.

To find Buffett’s full shareholders’ letter, go here.

The writer of this article, Carol Loomis, is a retired senior editor-at-large of Fortune. She is a longtime friend of Warren Buffett’s, the pro bono editor of his annual letter to shareholders, and a Berkshire Hathaway shareholder.

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