Capital Gains Taxes

[mountaintosea]

Anybody selling some of their stocks with the idea that long term capital gains may go up next year?

 

[Zathras]

I am not, however I also have no plans to sell any particular stock next year.
If I was planning to sell in the first half of the year anyways, I would definately consider doing it before the end of the year.

 

[mountaintosea]

I wasn't thinking about selling any either. But I keep hearing some recommendations on radio etc. to sell if you have gains. I have some pretty good gains but quite frankly unless I turn it around and buy more stock what else would I do with it? Bank rates are pretty poor.

 

[Zathras]

Well again, if they are stocks that you are sure you are going to sell in the near future, you can either get taxes at a %15 rate or a %20 (? is it 20% or as ordinary income??).
So even if you can't make a lot while it sits and you wait to put it to work, you have at least 5% differential in your favor by selling before the end of the year.
This is not investment advice for your specific situation, you would need to check with your own advisor or do your own research. But IF it were me, I would take a look at how quickly I am planning to put the proceeds to work.

 

[FIREd]

I am not trying to maximize my capital gains this year, but I am trying to maximize any income taxed as ordinary income for 2009 and 2010. So we have been exercising a bunch of stock options, because our marginal tax bracket is scheduled to go up in 2011 and, with the threats of SS tax uncapping and surtaxes for the "rich", it seems like a no-brainer.

 

[plex]

OP, you are talking about what is known as "tax loss harvesting". This is something that is often done by those with a fair amount of investing knowledge, and funds in their taxable accounts which have lost more than you have put into the fund (principle).

Tax loss harvesting is often used because you are allowed to get a credit up to 3k each year for any losses in lock in (there is a proper process to doing this). Additionally, I believe, you can offset taxable gains when you are liquidating funds, rather than re-investing. This results in much lower taxes for funds that have been appreciating for significant periods of time (so you essentially want to harvest any losses you reasonably can in a taxable account).

If I had money in taxable accounts, I would definitely have harvested the losses back in April 2009 when I made my Roth contributions for the year, and shifted to a more aggressive allocation.

 

[LOL!]

I have mountains of realized capital losses, so I won't be paying any cap gains taxes for decades, if ever.

Think for yourself. Do not listen to the radio, TV, or read internet forums.

 

[73ss454]

Yup, at 3K a year I have until I'm 90 taken care of.

 

[audreyh1]

I feel fairly confident that the capital gains tax rates will not go up until 2011. It is politically much easier to simply let the "temporary Bush Tax Cuts" expire as scheduled after 2010, especially with a still weak economy.

And so many people are showing losses rather than gains that I see the temptation to take gains to be much more limited than it would have been at 2007 levels. A lot of people sold over the past 12 months.

In fact, there was so much selling during the worst of the bear market that I felt like people were already doing any possible tax-motivated selling!

Audrey

 

[TomCat]

I did significant tax lost "harvesting" in Q4 2008 and again in Q1 2009...I did this in 2008 to offset some early 2008 capital gains I had realized...and in Q2 2009 to set up a "working" tax loss position.

Later in 2009 I have sold some equities at a gain to move to a different allocation...and used much of the earlier tax loss to offset the gains. My past life includes a number of years of practice as a tax accountant at a large CPA firm...not sure some days if that is good or bad

I would think at a minimum you would want to look at matching tax losses with gains you already have realized...not sure if I would sell "Gains" merely to offset losses...probably an investment rather than a tax call.

BTW...it is NICE to be discussing GAINS...a year ago we all were speaking of tax losses. TomCat

P.S. SNOW coming with wind to Minnesota today...better stock up

 

[calmloki]

Gains? Did sell all of the bedrock GM stock we padded the mattress with - holding on to the BofA - if it doubles we're all the way to even!

 

[kaneohe]

I would think at a minimum you would want to look at matching tax losses with gains you already have realized...not sure if I would sell "Gains" merely to offset losses...probably an investment rather than a tax call.

Tom Cat........possibly I may be misinterpreting what you said in the first sentence here but it sounds like if you have already realized gains, then you would want to look at taking losses to match. Isn't that very much an individual situation ..........if you were in the 15% bracket w/ gains that are, at least for now, free, taking matching losses would gain you nothing. What you would have gained once you reinvest would be a lower basis, setting you up for larger future taxable gains...........so TLH not for everyone.

 

[TomCat]

Tom Cat........possibly I may be misinterpreting what you said in the first sentence here but it sounds like if you have already realized gains, then you would want to look at taking losses to match. Isn't that very much an individual situation ..........if you were in the 15% bracket w/ gains that are, at least for now, free, taking matching losses would gain you nothing. What you would have gained once you reinvest would be a lower basis, setting you up for larger future taxable gains...........so TLH not for everyone.

I agree that some may not want to offset 15% LTCG...but I do not understand your reference to "free...taking matching losses would gain you nothing"?

My LTCGs are never "free"...and I did choose to offset LTCG with LTCL to save the taxes on the LTCG...other may wish to try and use the LTCL $3,000? per year...would not likely work in my case since I generate LTCG pretty much every year.

To sumarize...you are correct "harvesting" capital losses to offset LTCG (or STCG) is an individual choice. Many (most?) will elect to save cash now...even if they re-invest their "losers" immediately in "equivalent" but not the SAME securities (ie "wash sales" avoidance).

Also...it was a long time ago when I was a compensated tax professional...my comments are only worth what you paid for them...YMMV...TomCat

P.S. I usually have a "draft" return on TurboTax to "play" with different yearend planning choices (pre yearend) to determine actual Fed and State tax savings of different choices. Also particularily helpful when deciding (post yearend) what contribution to put into my wife's and my Individual 401(k) Plans...we are both self employed. That is the last thing I do b/4 filing the return so test numbers are "actual"...and nicely show the fed/state tax savings...TomCat

 

[kaneohe]

TomCat
Quote:
Originally Posted by kaneohe
Tom Cat........possibly I may be misinterpreting what you said in the first sentence here but it sounds like if you have already realized gains, then you would want to look at taking losses to match. Isn't that very much an individual situation ..........if you were in the 15% bracket w/ gains that are, at least for now, free, taking matching losses would gain you nothing. What you would have gained once you reinvest would be a lower basis, setting you up for larger future taxable gains...........so TLH not for everyone.
I agree that some may not want to offset 15% LTCG...but I do not understand your reference to "free...taking matching losses would gain you nothing"?
**********************************************************************

Tom Cat.....my apologies for the ambiguous post. What I meant was that if you are in the 15% bracket (for all income, not the LTCG rate), then your LTCG are taxed at 0%
(free) already, so taking capital losses to offset those gains would gain you nothing more. Even worse, they possibly lower your basis on any replacement funds you buy and set you up for bigger gains in the future which might be taxed (at possibly higher rates).

 

[mountaintosea]

Audrey actually I had heard that theory also. Thanks for mentioning it.
I had already sold some losers. There's one stock in particular that I've done well with and I'm not sure I'm ready to sell it at this stage for the 15% tax. I was going to let the rest of them ride.

 

[RE2Boys]

I took a different interpretation of the OP's question. I've also considered the feasiblilty of harvesting CG in anticipation of increased CG tax rates in 2011. Sell my 15 year old position and in some cases buying it back the next day. Essentially paying the taxes (if any) on my old position and re-establishing a new basis. When all done, still have the stock investment, a new basis, cost me $26-$30 in broker fees.

Of course, best to run it through a what-if scenario on tax software as the sale would likely effect your AGI which effects a lot of other credits etc.

RE2Boys

 

[calmloki]

Had a talk w/ our tax person yesterday and discover I have about $11k in carryover stock sale loss from last year. My understanding is that $3k/year of that loss can be used to offset regular income and the rest could be used to offset gains from stock sales this year. Looks like we have some HP stock bought many years ago that could be sold at a profit. Right now I'm thinking that it might be smart to sell $8k of the HP and use up the carryover loss. My thought is that if we bought the HP back in 31 days we could avoid paying tax on the $8k gain at what I think would be a higher rate in the future. Feels like the chance of the value of carryover tax write-off being diminished at some point in the future is greater than zero, so why not avoid that risk by taking it now.

OTOH, we are taxed at over 15%, so being able to offset $3k of higher tax ordinary income vs. LTCG income should be of greater value...if we're taxed at 20% does that result in an effective 5% gain? Really not sure how to view a carry forward loss - it's value assuming no tax status or law change remains constant - no compounding - but using the loss by selling appreciated stock doesn't feel like it makes the loss more valuable either - except perhaps through the effects of inflation eroding the value of the loss....

Lord willing and the tenants don't move our income is on track to stay pretty constant - we can't do anything in the way of Roths or IRAs or suchlike. We don't have huge amounts in the market - might be 6-7% of our net worth. Stocks n' bonds are not something I focus on without glazing over pretty badly - what all am I misunderstanding or missing or looking at incorrectly?

 

[kaneohe]

I have about $11k in carryover stock sale loss from last year. My understanding is that $3k/year of that loss can be used to offset regular income and the rest could be used to offset gains from stock sales this year.

calmloki......not sure if you intended to phrase that 2nd sentence the way it is...but I think it is backwards: the carryover loss can be used to offset any capital gains (from sales or fund distributions). The leftover (if any) can be used to offset ordinary income (up to 3K/yr). For example if you had 11K in capital gains, the carryover losses would offset those and there would be nothing to offset against ordinary income.

One extreme is if you have no capital gains for the next few yrs. You get to use 3K/yr against ordinary income for 4 yrs (only 2K the last yr.) and, if you are in the 25% bracket, you gain 2.75K. The other extreme is if you use the losses against capital gains only. If you are in the 15% bracket for CG, you gain 1.65K. Of course in the real world rates are going to be changing in the new few yrs so that complicates things a bit and you have to derate the 1st example a bit to account for the fact that the benefits come over 4 yrs (time value of $$). My first impression though is that selling and then buying back HPQ might not give you the biggest benefit.

 

[calmloki]

calmloki......not sure if you intended to phrase that 2nd sentence the way it is...but I think it is backwards: the carryover loss can be used to offset any capital gains (from sales or fund distributions). The leftover (if any) can be used to offset ordinary income (up to 3K/yr). For example if you had 11K in capital gains, the carryover losses would offset those and there would be nothing to offset against ordinary income.

One extreme is if you have no capital gains for the next few yrs. You get to use 3K/yr against ordinary income for 4 yrs (only 2K the last yr.) and, if you are in the 25% bracket, you gain 2.75K. The other extreme is if you use the losses against capital gains only. If you are in the 15% bracket for CG, you gain 1.65K. Of course in the real world rates are going to be changing in the new few yrs so that complicates things a bit and you have to derate the 1st example a bit to account for the fact that the benefits come over 4 yrs (time value of $$). My first impression though is that selling and then buying back HPQ might not give you the biggest benefit.

See what you are saying - yes, first apply carryover to LTCG, then to up to $3000 in ordinary income. Just looked at the tax tables, and if my AGI was over $82,500 i guess any amount over that would be taxed at 28%, so if AGI was $85,500 a $3000 carryover loss subtraction would save me $840 in taxes the first year or $3080 over 4 years assuming no LTCG in those 4 years. Hmm - is the carryover loss applied to any LTCG, or only stock sale profits - very likely to sell a place next year. If it can be used against any LTCG, that might argue strongly for having no LTCGs this year, writing off $3000 toward ordinary income, and then using the rest of the carryover loss next year.

 

[kaneohe]

Just looked at the tax tables, and if my AGI was over $82,500 i guess any amount over that would be taxed at 28%, so if AGI was $85,500 a $3000 carryover loss subtraction would save me $840 in taxes the first year or $3080 over 4 years assuming no LTCG in those 4 years. Hmm - is the carryover loss applied to any LTCG, or only stock sale profits - very likely to sell a place next year. If it can be used against any LTCG, that might argue strongly for having no LTCGs this year, writing off $3000 toward ordinary income, and then using the rest of the carryover loss next year.

Calmloki.........I think you might mean "taxable income" instead of AGI since the tables you are looking at are based on taxable income (=AGI minus deductions and exemptions). The carryover losses can be applied to real estate gains also (although possibly not to the part due to depreciation.....pls check on that part). Even if you couldn't use it against the real estate, you could still use 3K of it against ordinary income next yr (if it wasn't offset by other capital gains) and possibly you would get more benefit that way.

 

[free4now]

I'm FIRE'd and in a low tax bracket, so this year I did enough sales to eat up all the zero cap gains tax bracket, figuring that will go away soon so I might as well feast while I can.

But I draw the line at intentionally incurring cap gains tax as a speculative move anticipating higher CG tax rates. I figure it's best to defer paying my CG taxes as long as possible. Who knows, maybe in a decade or two things will swing the other way again and CG tax rates will be lower than they are now, and I will also have deferred paying them for a decade or two. Or maybe capital markets will collapse and I'll end up with losses rather than gains decades from now.

I always have flashbacks to the dotcom era when people I knew incurred huge tax bills by exercising their qualified stock options early intending to save a few bucks on tax, and then were caught when their values plumetted and not worth enough to pay their tax bill. I know one guy whose net worth peaked at 2 million, then dropped to $10k after paying his taxes on prematurely exercised options. And I know others who were left with big IRS bills and no way to pay them. It's not really a rational fear because we're talking about doing much less bold moves here, but it's a fear I respect.