Thanks to all on this distinguished panel I am learning more and more about taxable accounts. I have a two part question about 100,000 investment I have recently opened at Vanguard. I am currently in the 15% tax bracket. If at some point next year for example I realize a 10,000 long term capital gain can I then reinvest back into these positions? I believe then that my new cost basis would be 110,000 and no tax due on the gain because the sale added to my income would keep me in the 15% tax bracket? Secondly are dividends added to my cost basis? What if they are realized?
cost basis revisited
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Thanks to all on this distinguished panel I am learning more and more about taxable accounts. I have a two part question about 100,000 investment I have recently opened at Vanguard. I am currently in the 15% tax bracket. If at some point next year for example I realize a 10,000 long term capital gain can I then reinvest back into these positions? I believe then that my new cost basis would be 110,000 and no tax due on the gain because the sale added to my income would keep me in the 15% tax bracket? Secondly are dividends added to my cost basis? What if they are realized?
If you have a profit and realize it, you would have a capital gain, which you can reinvest. If over 1 year it is long term. The capital gain is added to your other income, and if you are still in the 15% bracket, you would have no tax on the gain through 2012. Yes, your cost basis would be higher by that amount.
If dividends are reinvested they are added to the cost basis. They are always realized but can be taken in cash or reinvested.
I am not sure exactly what you are asking because of the lingo that you used but I am guessing because you are talking about "realized" dividends and capital gains that you might really be asking about distributions by the fund...which could be either dividends or capital gains or both. If you are talking about those, then you could have them reinvested and your basis would increase by the amount of your reinvestment.
Usually when the term "realized capital gain" is used, I think that you actually sold shares that had appreciated. In contrast, the term "unrealized capital gains" means your shares had appreciated but you only had a paper gain since you hadn't sold them yet. If you used the term "realized capital gain"
in this sense (which I suspect you did not), then when you sold some shares,
your basis would decrease by the basis of the shares you did sell, and then
increase by the amount of the reinvestment . Your new basis would then be
100K less cost basis of shares sold + 10K CG reinvestment =
110K less cost basis of shares sold
Usually when the term "realized capital gain" is used, I think that you actually sold shares that had appreciated. In contrast, the term "unrealized capital gains" means your shares had appreciated but you only had a paper gain since you hadn't sold them yet. If you used the term "realized capital gain"
in this sense (which I suspect you did not), then when you sold some shares,
your basis would decrease by the basis of the shares you did sell, and then
increase by the amount of the reinvestment . Your new basis would then be
100K less cost basis of shares sold + 10K CG reinvestment =
110K less cost basis of shares sold
