When to Sell Positions With Unrealized Gains

[RobLJ]

I will point out that it is likely if you sell over several/3-5 years, the tax (on gains) will be long term capital gains at 15%, which is only 3% over your 12% max, which to my mind is unimportant, although you may well disagree. So you can steadily sell 1/4-1/3 of these positions and move the proceeds into index funds over the next few years, since they also will generate capital gains at 15% tax.

Like you, I'm also..... slowly... simplifying our portfolio, mostly because we have 8 accounts and about 30 mutual funds (I got rid of 10 or 12 last year). Combining several of DW's small accounts over the last two years helped clear the way to simplifying.

My brokerage is only about 8% of our portfolio, which holds (too many) CEFs, so I also combined about 1/3 of them and switched to a US market and international index ETF, which doesn't generate much taxable dividends, just long term capital gains (see opening comment). I do take tax losses to offset gains and also try to stay below the 12% max income tax level; if I miss by a couple or 5K, though, I don't worry (haven't yet).



The E-trade IRA (DW) is only about 8%, about 2/3 in stocks. I struggle with your question, but I tend to sell half the position when it doubles, or about 1/3 when it goes up 2/3 and put the gains in an ETF or index mutual fund. At some point I will merge this E-Trade account with her (now large) Fidelity account.

Not sure this helps though, except for my point about the 15% LTCG tax is not much of a big deal if you are in the 12% bracket.

 

[target2019]

If CVS and DUK are long term, and in taxable, good time to cut or trim. Check the lot details.

What's in IRA you can just cut, and invest the proceeds in your VTI or money market.

Found another one for you, Citigroup.

C CITIGROUP INC $2,803.84 $545.50
CVS CVS HEALTH CORP $7,729.00 $150.40
DUK DUKE ENERGY CORP $6,300.20 $867.80

About $1550 in gains. If LT, a slam dunk.

We have the same dynamic, with SS, pension and dividends. Our scale is about half of yours. The three factors are a counterweight to your Roth conversion wants.

We have two more years of 12%, TCJA expires 2025, and my RMD comes up in 2026. As Tranquility Base mentioned, there are several moving parts, and you make decisions.

 

[Tranquility Base]

I will point out that it is likely if you sell over several/3-5 years, the tax (on gains) will be long term capital gains at 15%, which is only 3% over your 12% max, which to my mind is unimportant, although you may well disagree. So you can steadily sell 1/4-1/3 of these positions and move the proceeds into index funds over the next few years, since they also will generate capital gains at 15% tax.

Like you, I'm also..... slowly... simplifying our portfolio, mostly because we have 8 accounts and about 30 mutual funds (I got rid of 10 or 12 last year). Combining several of DW's small accounts over the last two years helped clear the way to simplifying.

My brokerage is only about 8% of our portfolio, which holds (too many) CEFs, so I also combined about 1/3 of them and switched to a US market and international index ETF, which doesn't generate much taxable dividends, just long term capital gains (see opening comment). I do take tax losses to offset gains and also try to stay below the 12% max income tax level; if I miss by a couple or 5K, though, I don't worry (haven't yet).



The E-trade IRA (DW) is only about 8%, about 2/3 in stocks. I struggle with your question, but I tend to sell half the position when it doubles, or about 1/3 when it goes up 2/3 and put the gains in an ETF or index mutual fund. At some point I will merge this E-Trade account with her (now large) Fidelity account.

Not sure this helps though, except for my point about the 15% LTCG tax is not much of a big deal if you are in the 12% bracket.

At this point, all the capital gains will already be long term. I don't have to wait for any to change from short term to long term. I agree with you; 15% being 3 percentage points greater than 12% is not a big deal.

 

[Tranquility Base]

LTCGs aren't covered by the regular income tax brackets, so you could be in the 12% bracket with endless LTCGs taxed at 0%, 15%, 20% or 23%. If you want to stay at 0% LTCGs, you'll be very limited in what you can do with LTCGs and Roth conversions. And at that income level you may be pushing more of your SS benefits into being taxed.

It is easy to lose track of the tax return forms themselves when you use software (TT for me). Years ago I used to prepare tax returns and I recalled the different taxation of LTCGs. So to refresh my memory and try to burn the point into my brain, I went back to my 2023 tax return to try to track this out. But I think I hit a brick wall.



The LTCGs get calculated on Schedule D and Form 8949. The resulting number gets entered on Line 7 of Form 1040-SR. That number is included in the calculation of AGI at Line 11 and Taxable Income at Line 15. So where is the 0-15-20-23% taxation of LTCGs taking place and where are the LTCGs getting excluded from Taxable Income? The LTCGs appear to me to being included in Taxable Income at Line 15.

 

[RunningBum]

Look at the Qualified Dividends and Capital Gains worksheet. I stepped through it a few times years ago to fully understand the concept, but the shortcut is to look at line 17 to see how much LTCGs/QDivs are taxed at 15%, and line 20 for 20%. 23% is a different calculation and it shows up on Schedule 2, line 12.

TT will show this under Forms. The last time I used H&RB it didn't show it separately, but instead buried the calcs somewhere. I didn't like that. Maybe it has changed.

 

[Tranquility Base]

Look at the Qualified Dividends and Capital Gains worksheet. I stepped through it a few times years ago to fully understand the concept, but the shortcut is to look at line 17 to see how much LTCGs/QDivs are taxed at 15%, and line 20 for 20%. 23% is a different calculation and it shows up on Schedule 2, line 12.

TT will show this under Forms. The last time I used H&RB it didn't show it separately, but instead buried the calcs somewhere. I didn't like that. Maybe it has changed.

Thanks. I managed to figure out that the calculation is done in a worksheet. So I have looking through my return to try to find it. TT seems to bury the calculation somewhere too. I'll keep looking until I find it.

 

[RunningBum]

Thanks. I managed to figure out that the calculation is done in a worksheet. So I have looking through my return to try to find it. TT seems to bury the calculation somewhere too. I'll keep looking until I find it.

I'm using the download version and when I click on Forms in the upper right, I see this worksheet somewhere between the 1040 and Schedule B.

If you're using TT online, I have no idea.

 

[Tranquility Base]

I'm using the download version and when I click on Forms in the upper right, I see this worksheet somewhere between the 1040 and Schedule B.

If you're using TT online, I have no idea.

Many thanks!! I think I found it. It seems to be called "QualDiv/CapGn" in TT.



I too use the download version of TT but I was looking at my printed copies of my tax return, that is, the PDF files. I print all possible PDFs and was looking at the one that includes all calculations. I couldn't find it there. So after your post above, I started up TT. (It's always comforting to see TT download 4-5 minutes of updates AFTER I have already filed my tax return.) I knew exactly where to look, followed your instructions, and there it is. So I will digest this more a bit later. I'm getting a bit pinched for time. I also want to go back and look at the "With All Calculations" file and see if the "Form 1040 Line 16 Qualified Dividends and Capital Gain Tax Worksheet" appears there. I'm guessing not because given the title of the worksheet, it would be pretty hard to miss it.


So if I am understanding your original point correctly (which is what led me to looking for this calculation worksheet), I can have a lot of LTCGs and Qualified Dividends and they won't push me out of the 12% tax bracket because they are not included in the part of my taxable income that is subject to the 12% tax bracket. For all practical purposes, I think my LTCGs are always going to be in the 15% bracket, at least as it is presently constituted.


Thanks again.


Footnote: I looked at the PDF printout of my tax return that has "All Calculations" and the "Form 1040 Line 16 Qualified Dividends and Capital Gain Tax Worksheet" does appear there. So despite the descriptive title, I still managed to miss it.I think I was looking for a different form number that I saw in the instructions for Form 1040. But it's there!!

 

[Tranquility Base]

Look at the Qualified Dividends and Capital Gains worksheet. I stepped through it a few times years ago to fully understand the concept, but the shortcut is to look at line 17 to see how much LTCGs/QDivs are taxed at 15%, and line 20 for 20%. 23% is a different calculation and it shows up on Schedule 2, line 12.

TT will show this under Forms. The last time I used H&RB it didn't show it separately, but instead buried the calcs somewhere. I didn't like that. Maybe it has changed.

Whew! I have finished looking at the Qualified Dividends and Capital Gains worksheet for my 2023 tax return. Line by line. Not the best way to have a good time but it was illuminating. The main thing I realized is that unless there are drastic changes in my income next year (or to the tax code for that matter), I have been too concerned about LTCGs. The tax on them in 2023 just wasn't that much.


I have yet to revisit my Roth conversion spreadsheet. I probably have been underestimating the room I have for doing a Roth conversion. I'm not going to sweat that much though because there are just so many moving parts. It might be better to put some time into learning how to run scenarios for next year in TurboTax.


Thanks again RunningBum!

 

[Al18]

If you’ve already completed your taxes for 2023 in TT, I recommend you copy your TT file and rename it to TestTax23. You can now open the new Test file and add another transaction, such as selling $6000 in stock with a $3000 LTG and see how it affects your taxes.

 

[RunningBum]

Glad to help, especially since you took the initiative to educate yourself for the future by examining the worksheet.

 

[Kat07]

I'll have to reevaluate my spreadsheet to address your points about the LTCGs. This is one item I would have liked to discuss with my former accountant but I could never get his time for much more than tax preparation. We would invariable have our information to him by late February. We got tired of April 10 rolling around and wondering if we would hear from him before April 15. We always did. But we tired of the waiting and wondering.


Good point about the heirs. I hope to live many decades more. But the reality is that our annual income needs will be met (and more) once RMDs kick in for us in a couple of years and once I start taking my social security at age 70. So there isn't likely to ever be a need to sell these particular stocks. I just don't like having the complexity. (No need for kind volunteers to offer to take them off my hands.)


It's good to know that I don't have a monopoly on messing up spreadsheets. On the bright side, I've learned a lot each year about spreadsheets and good design versus bad design. But sometimes I feel like I've fallen into the spreadsheet business. And what is my other half going to do if and when I go first?

I don't have individual stocks, just mutual funds. But I would love to see an example of someone's spreadsheet and what they enter into it. The only spreadsheets I use is to track expenses for my vacation rental and another one for the renters income. I also have one where I keep track of all my financial holdings like cash, CDs, IRAs, brokerage accounts, etc. Maybe that's good enough, have no clue!

 

[TheWizard]

Part of OP's "problem" might be their current 12% Federal tax bracket and the associated 0% taxation of LTCGs. While it's nice to have those percentages, where will you be in several years when age 70 SS and then RMDs start?
Perhaps the 22% bracket with 15% taxation of LTCGs?

Nonetheless, I'm waffling on whether it makes sense to sell any individual stocks with big gains vs just leaving them for eventual stepped up basis and just putting all new money into indexed ETFs.
Depending on relative size of your tax-deferred accounts, it might be better to focus on Roth conversions and just leave the unrealized CGs alone...

 

[TheWizard]

I don't have individual stocks, just mutual funds. But I would love to see an example of someone's spreadsheet and what they enter into it. The only spreadsheets I use is to track expenses for my vacation rental and another one for the renters income. I also have one where I keep track of all my financial holdings like cash, CDs, IRAs, brokerage accounts, etc. Maybe that's good enough, have no clue!

Similar here, no individual stocks, just MFs and ETFs in all three of my accounts:
Tax-deferred
Roth IRA
Taxable brokerage

I think what you have is good enough for tracking your investments, no additional spreadsheet really needed.
A key point, especially in your taxable account, is to select Specific ID for all purchases and NOT reinvest dividends automatically.

I think some folks have a "hobby" of building spreadsheets to track all of their investments dynamically but just because it can be done doesn't mean it should be.

When I raised $40k for my new car purchase last fall, it was quite easy to log into my Vanguard account and examine all of the lots in my taxable account.
I then selected those with the least LTCG to sell.
Actually, the selected lots all had small capital LOSSES which I can use to offset $3k of Ordinary Income each year.

Point being: no personal spreadsheet was needed to do what I did efficiently...