Strategy for disposing of valuable but risky asset

[Sojourner]

Let's say you hold a particular asset, such as an individual stock, that comprises about 15% of your total net worth. Let's say that stock is at a 15 year high right now, up more than 800% from its low during that period, and you wanted to begin disposing of it as quickly as possible but in a tax-efficient manner. Let's say you will owe substantial cap gains due to its massive run up in value.

Would you seek to sell it all at once in order to use the cash proceeds to diversify as quickly as reasonably possible into your chosen AA, or would you sell it off more slowly, seeking to spread out your CG tax burden over a number of years and selling more in years when the stock is up and less when it's down? Are there other strategies that might make sense besides these?

 

[GrayHare]

I'd sell it off slowly or donate portions directly to charity.

 

[Ian S]

Well it depends on your tax bracket, whether there are both short term and long term capital gains, what you think might happen to the stock during a correction, etc. We are getting close to the end of the year, so rather than sell it all at once, you could sell some now and the rest in January. You could put in a stop loss type order to squeeze a bit more gain out, you could use an option strategy to preserve current gains into the new year. Btw, the 15% long term capital gains rate extends up to an income of well over $400K but you have not indicated what amounts we're talking about.

 

[Z3Dreamer]

You wanted ideas:

Get 2016 Turbotax and run various scenarios. Choose the one that works for you - selling all at once or spreading over multiple years. Maybe, half on Monday and half on January 1 vs all at once.

Or, I once did a tax return for a man who had inherited thousands of shares of some company from his dad. Basis was $1 but shares were hundreds of dollars per share. He had a $3 million AGI, so him giving 20 gifts of 100 shares each was not a big thing.

Or give it all away at once. Pick some worthy group. Work with them. Maybe they will name their next building the Sojourner Hall. You will be limited in how much you can take in one year but the excess carries over. Please run it through Turbotax.

 

[GrayHare]

Another strategy is a Charitable Remainder Trust and similar trusts. Via a CRT you can sell all the shares at once (if you wish) and still spread the income over many years. You get a nice up front tax deduction when funding the CRT with your shares and a charity gets whatever remains at the end of the period.

 

[flintnational]

I would base my decision on the perceived risk of the asset/stock. If it is an asset/stock subject to wide price swings, I would worry less about the tax implications and sell sooner. If the asset/stock has a more stable price profile, I would pay more attention to the tax implications and sell over time. And, if I could not make up my mind, I would split the baby.

FN

 

[donheff]

I'm in a high enough bracket that the CGs will be the same whenever I sell. So I woould dump that toxic risk all at once and get the proceeds into index funds..

 

[Sunset]

I would sell it all if it would be taxed at 15%.

If the amount is higher than that, I'd sell enough now so it is taxed at 15% ( total income of $418,400).

Any more and the tax rate is an extra 5%

 

[audreyh1]

I would base my decision on the perceived risk of the asset/stock. If it is an asset/stock subject to wide price swings, I would worry less about the tax implications and sell sooner. If the asset/stock has a more stable price profile, I would pay more attention to the tax implications and sell over time. And, if I could not make up my mind, I would split the baby.

FN

This.

 

[ace8]

Collars are another technique you can use to craft your strategy. Collars can be used to help remove risks of large pull backs.

As Sunset points out, absolute values matter here and also your plans for the proceeds.

AA88

 

[audreyh1]

I would sell it all if it would be taxed at 15%.

If the amount is higher than that, I'd sell enough now so it is taxed at 15% ( total income of $418,400).

Any more and the tax rate is an extra 5%

For 2017 MFJ the 20% cap gains rate is above $470K total income. And you will be paying the NIIT so the effect is 23.8% tax rate on those capital gain.

Also - if your total income exceeds $200K/$250K you will pay an additional 3.8% Net Investment Income tax on the capital gains that exceeds that amount. So you have an effective tax rate on those capital gains of 18.8%.

And large capital gains means you will likely pay AMT on some of your ordinary income (but not your long-term capital gains).

 

[RunningBum]

If it's all going to be taxed at 15%, it makes no sense to me to spread it out for tax purposes, unless you have some other reason such as qualifying for an ACA subsidy. I mean, what's the point, 15% is 15%, and you'll have the money from the proceeds to pay for it so why worry about a large tax bill when you've walked away with 85% of those gains. In fact, I kind of wish I had taken more gains when I wasn't controlling income for the subsidy, because no I'm constrained on how much I can sell without going over.

OTOH, if you have room under the 15% bracket to have some taxed at 0%, or if you're getting into the 20% rate, you might spread it out some.

Gifting some shares, or a CRT if this is a significant amount, are certainly good strategies.

If you have other reasons for spreading out, like seeing if you might still get more gains, that's a different question, but you only asked about tax situations so my advice is to sell most or all of it at 15% gains and get your investments where you want them to be sooner rather than later.

 

[Sunset]

For 2017 MFJ the 20% cap gains rate is above $470K total income. And you will be paying the NIIT so the effect is 23.8% tax rate on those capital gain.

Also - if your total income exceeds $200K/$250K you will pay an additional 3.8% Net Investment Income tax on the capital gains that exceeds that amount. So you have an effective tax rate on those capital gains of 18.8%.

And large capital gains means you will likely pay AMT on some of your ordinary income (but not your long-term capital gains).

Thanks for the detailed clarification.

Well now I know of a website that is wrong
https://www.fool.com/retirement/2016/12/04/your-guide-to-tax-brackets-in-2017.aspx

You can also tell I've not had any super sales in CG so far

 

[Sojourner]

Thanks for the ideas and feedback so far. To answer a few questions, it would all be subject to LTCG, and I'd almost certainly limit my yearly sales to stay in the 15% CG bracket. I would be using the proceeds to increase my bond/fixed-income allocation and to diversify into more broad market index funds. I like the idea of using collars, and I also read that "trailing stop loss" orders might be helpful in this kind of situation.

 

[CoolChange]

Collars are another technique you can use to craft your strategy. Collars can be used to help remove risks of large pull backs.

As Sunset points out, absolute values matter here and also your plans for the proceeds.

AA88

Careful with this if your asset is subject to special regulation. I am in a similar situation with company stock (risky and too much of my allocation); but, I am prohibited from hedging, short selling, etc.

Technically, I am also still an insider; so, even simple selling is somewhat more complicated than I would like.

 

[pb4uski]

In OP's situation I would buy some at the money put options on that issue if possible to hedge the embedded gains.... assuming that there is no prohibition against doing so which I suspect does not apply from what the OP wrote.

If OP can liquidate position over a sensible number of years and pay 0% CG tax then that would be considered.... otherwise, if it is a matter of paying 15% eventually, I would liquidate and reinvest.

 

[RenoJay]

I wouldn't let the tax tail wag the investing dog. If you believe the stock is over-priced by more than what the tax hit will be, I'd take the tax hit pretty quickly. If, however, you think it's a sustainable price level, then I'd slow down the sale of shares.

 

[brett]

Another vote for ignore the tax. It is secondary. Two things to concern yourself with. First of all the stock itself. Second is your overall exposure/dependence on this asset to fund/enhance your retirement.

I almost got stuck holding the bag on a large chunk of stock options. On the advice of several others who were smarter than me we decided to move them out. We decided that protecting our retirement/early retirement was the primary goal. We started to exercise at $43 and increased the rate as the stock price reached the low fifties. Tax was an issue but in our jurisdiction options are taxed at half.

So glad we did. The stock reached a high of $56 but within a year or so later it was sitting in the low/mid twenties. At the time we started selling all the wags were calling for a $75 stock price in 18 months. I know several folks whose early retirement was impeded by not exercising and selling the their stock options. Two reasons. Tax was one. Second was they were mistakenly calculating their profits on a projected stock price that did not materialize.

Acting on that advice has enhanced our early retirement and left us with a great deal of financial security.