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Sell in 2010 to incur lower Capital Gains Tax Rates?
Old 06-15-2010, 09:14 PM   #1
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Sell in 2010 to incur lower Capital Gains Tax Rates?

I have $200K of long-term capital gains.
Is it best to sell now in 2010 (and reinvest after 30 days) to incur cap gains tax in 2010 at the lower rates or simply hold (for perhaps 15+ years longer) until I actually need to withdraw these funds in my retirement?

My total tax estimate if I did this in 2010 vs 2011 (or after) is:

2010 - tax due is $27K
2011 - tax due is $41K

So $14K higher tax if I don't do this in 2010.

Seems like selling (and reinvesting after 30 days) would be best. Am I missing something? Thanks.
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Old 06-15-2010, 09:34 PM   #2
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Why would you wait 30 days to reinvest? Why wouldn't you reinvest 1 second later?
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Old 06-15-2010, 09:39 PM   #3
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Do you think you will ever have $200K in realized capital losses over the coming years? With judicious tax-loss harvesting, you could possibly pay no capital gains taxes. What about your realized capital losses from 2000-2002 and from 2008-2009 and from last month?

What about the future when you are retired and in a lower tax bracket?

What about when you die and your heirs get a stepped up basis and no tax on those capital gains?
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Old 06-15-2010, 09:40 PM   #4
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You don't need to wait 30 days. You might be thinking of the wash sale rule, but that applies to taking tax losses, not capital gains. If you sell a stock with a long-term capital gain, you can immediately repurchase it -- so if you like the stock long term, you can do this and lock in a maximum 15% rate on the gains from this sale and then buy it again.

There are other reasons potentially not to do it, but those are mostly from the estate planning angle. Basically, if I thought I'd be selling the shares in my lifetime, I'd probably sell and lock in a 15% tax rate, but if I thought these shares may still be in my account when I croaked I wouldn't.
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Old 06-15-2010, 09:49 PM   #5
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One can also avoid cap gains taxes by donating shares to charity.
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Wash Sale
Old 06-15-2010, 09:50 PM   #6
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Wash Sale

Yes, you're right. I was getting that mixed up with the wash sale rules.
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Old 06-16-2010, 12:34 AM   #7
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You might want to consider what assumptions you are modeling.....if you sell now and pay e.g. 15% LTCG, one model might be that you pay those taxes from the proceeds and therefore could only reinvest original investment + 85% of profits. If you didn't sell, you would have original investment + 100% of profits invested......that is, you would have more invested. If there was significant growth over the next holding period, not selling would produce a larger gross amount , perhaps enough to overcome the higher tax rate.

EX: (check the math please)
Ex 1) 100K original investment;200K gain = 300K value;
sell now, pay 15% taxes on 200K gain = 30K; reinvest 270K;
over net holding period (15 yrs?), stock doubles to 540K;
gain now is 270K; pay 20% tax =54K; net proceeds 486K

Ex 2) 100K original investment; 200K gain = 300K value;
Don't sell now; over next holding period, stock doubles to
600K; gain now is 500K; pay 20% tax = 100K, net proceeds 500K
Here you paid 1 tax of 100K vs Ex 1) 30K + 54K = 84K.
However since you had more invested in Ex 2, the extra gains
more than made up for the extra taxes paid.

I didn't do the alternative approach of assuming you paid the
LTCG tax out of other funds and reinvested the gross proceeds.
You might get a different interpretation like a Roth conversion where the
suggestion is to pay the conversion tax out of other funds but you
would have to account for having less funds in your other taxable account.
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Old 06-16-2010, 04:01 AM   #8
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This months Schwab investing newsletter has an article about this subject.

There calculations are that if you intend don't need the money for a long period of time you are better off keeping it. In fact you end up with 6% more after tax money if you don't sell after 10 year. Assuming an 8% growth rate.

One thing I didn't know is there is actually an 18% capital gain tax rate for stock held more than 5 years. The extra 2% is hardly worth getting excited about but it does make it an even more dubious idea to sell an investment that you've held (like an index fund) for several years that you intend to hold in the future.
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