How to protect unrealized gains?

[kite_rider]

The last decade has been great for US Equities (especially Tech which is where I tend to invest) and I've been fortunate enough to rack up a lot of unrealized gains. I feel like I'm far too overweight in a few stocks that have run up the most and am looking for the best strategy to protect some of these gains as I wind down my position over the next few years.

Ideally, I'd like be able to sell of just enough appreciated equity to keep taxes low and maybe on day get one of those coveted ACA subsidies! Right now, any additional LTCG sale will be taxed at > 30% (18.9% LTCG, 9% state, + higher rate for other income and phase out of deductions and credits). I'm thinking that I'll get a lower tax rate in the future by spreading out the selling; I just don't want to lose those unrealized gains in the meantime...

So I'm considering buying puts and perhaps leap options for these stocks. Of course if the stock goes down and I exercise the put I'll have the same big tax liability in a future year, so maybe this isn't a good idea? Similar question with a LEAP option, maybe the cost of the option is higher than the additional tax I would be paying right now anyway, so I wouldn't be saving anything over just selling the stock today.

Sorry for the long post, but would love to hear anyone's thoughts or suggestions on this idea.

 

[clifp]

One option (pardon the pun) you might want to consider is creating a series of rolling collars. A collar is writing an out of the money covered call and purchasing and out of the money put.

So lets take a prime candidate for "I made a lot of money in tech stock" Apple.

Currently Apple is at 219.

You would sell a Jan 2019 230 call at $7.13
You would buy a Jan 2019 210 put at $7.35

You would sell a Jan 2020 240 call at 18.80
you would put a Jan 2020 210 put at 19.05


You would sell a Jan 2021 250 call at 19.20
You would buy a Jan 2011 210 put at 20.30

Obviously you can adjust the strike price for your risk level. So basically you've limited your lost to $10 bucks or so and your profit to $10-40/share. You'll still collect Apples $3 in dividend but overall you've limited you profits to under 5% per year for the next two years. Now that may or may not be worth the tax savings.

It is absolutely a viable strategy if you think you are going to have significant reduction in taxes in the next two years, e.g. retire and move to place lower state taxes. (9% is that California, if so be aware that most states except California give a break for long-term capital gains.) If you are already retired and not moving, I wouldn't recommend it.

 

[imoldernu]

This is waaay over my head, but back when taxes were a concern, and what to do with assets was varied, I signed on to free tax websites, like Tax Act... and put the numbers in based on my options. Managed to withdraw all of my IRA's without penalty. Still do this every year.

We're in a far different tax bracket because we're definitely not wealthy, but by planning, we haven't had to pay any income tax.. state or federal, since we turned 65, seventeen years ago.

 

[kite_rider]

One option (pardon the pun) you might want to consider is creating a series of rolling collars. A collar is writing an out of the money covered call and purchasing and out of the money put.

I appreciate the suggestion and will do some more thinking on the collar. One concern is that it would knock me out of the stock immediately if either option is exercised by a large move in the stock in either direction. I would then have the same issue with a very large tax bill and no control over the timing of this event.

I'm really trying to figure out the best way to spread the (unrealized) gains over the next several years; like 5-10 or more!

The more I think about it, I'm leaning towards just buying put options. The logic is that I can cover the cost by just selling some appreciated shares and if the stock takes a big dive I could just sell the option (rather than exercise) and preserve some of the 'lost' gains while holding on for a future better exit point. Plus, this allows me to enjoy any upside on the stock.

Regarding the state; it's Oregon. They don't seem to care where you got the money as long as they get their 9%. There use to be a slight silver lining on that cloud with the federal SALT deduction, but that is now gone! I already own property in Washington and Texas and will probably switch residency as soon as the kids graduate from High School.

 

[clifp]

I appreciate the suggestion and will do some more thinking on the collar. One concern is that it would knock me out of the stock immediately if either option is exercised by a large move in the stock in either direction. I would then have the same issue with a very large tax bill and no control over the timing of this event.

I'm really trying to figure out the best way to spread the (unrealized) gains over the next several years; like 5-10 or more!

The more I think about it, I'm leaning towards just buying put options. The logic is that I can cover the cost by just selling some appreciated shares and if the stock takes a big dive I could just sell the option (rather than exercise) and preserve some of the 'lost' gains while holding on for a future better exit point. Plus, this allows me to enjoy any upside on the stock.

It is extremely rare for an option to be exercised more than a week or two before the exercise date, so I won't worry about that too much. I believe something like 95% of all options are exercised on the last day. If it happens you have to pay tax, which is no worse than selling it all today.

The maximum options that are available for Apple are 3 years and most stocks don't have LEAPs that extend more than year or 2. So you pretty much out of luck trying to hedge 5 to 10 years out that I can think of, unless you want to work with high-end wealth planner who would provide a customized solution for you. That cost serious $$

A year before retiring (all the way back in 98) I had 75% of my net worth in Intel stock. As soon as left California, I sold a big chunk but still ended up with 30%+ in Intel. The tech crash of 2000 solved that problem by cutting the price in 1/3. Over the last 18 years, I've been gradually getting rid of it, writing calls, gifting to a Schwab charitable fund, giving some to nieces and nephews, all in the name of avoiding taxes. My basis is under $1 for the stock.

But in reality, Intel has been dead money since 2000, all my clever tax schemes were much less beneficial than selling more of the stock back in 2000, paying the capital gains and investing the funds in a more diversified portfolio.

So while I'm a firm believer in smart tax strategy, don't let minimizing taxes get in the way of prudent investment decisions. 5 to 10 year in a tech stock is an eternity.

 

[kite_rider]

Ha! Small world, I'm also still selling off old INTC shares acquired through employee stock participation plans from the 90's. I also had way too much of my net worth in INTC back in '99 and also took a big whack when it went down. As you said, it's been 'dead money' for a long time since.

That being said, I piled back into INTC almost exactly 10 years ago (I'd left the company years earlier). Also loaded up on ADBE. At that time I was just looking to invest in tech companies that I hoped would survive the market meltdown...

Anyway, other shares that I'm 'overweight' in now are AMZN and NVDA.

I'm warming up to your suggestion on the collar after pricing puts that would protect my unrealized gains. For example with Adobe I can buy Jan 2020 puts at $240 and sell calls at $280 that wind up with very small net out of pocket expense. It limits the upside, but protects on the downside.