Is Zero Cap Gains Worth Holding on to a Company?

[Guamaniac]

This isn't much of a FIRE topic but hoping to hear from the good people who post hear. I invest for my 29 yo son who has learning disabilities. He lives with us and has a steady job that has him in the 12% bracket and some room for zero taxed LTCG's. In May of 2020 I purchased a good amount of ZM (yeah, I know) after seeing the upside of this company during the pandemic. It has grown to quite a substantial amount but I don't believe there's much more upside-at least compared to other companies I think can do better.

What I'm struggling with is whether to just sell and buy the "better" companies and put him into the 22% bracket or take advantage of the tax free gains every year until it's used up. It would probably take 5 or 6 years to use it up (and stay in the 12% bracket) and in the mean time we would probably generate more LTCG.

The lesson I learned from this was to allocate the companies in all of his accounts (tIRA, Roth, brokerage) not just his brokerage. I guess part of the decision is based on how much better another stock could do compared to the 15% cap gain savings. Just trying to think it through and appreciate any thoughts.

 

[Aerides]

If you think you can move the money to other companies and exceed the 1-year tax hit with added growth, then it is a good move to take the hit and sell now, buy other things. Better to take the lumps and move to a faster moving car if you believe your car is stalled/sluggish.

And since you're presumably investing for long term growth for your son, I'd say plop it into a nice index fund (VTSAX, etc.) and then ignore it for a long time.

 

[Sojourner]

Why are you trying to pick individual stock winners and losers in your son's investment accounts? Just put him into broad-based, total market index funds. Something like an ultra low-cost S&P 500 fund, or an "all world" global equities fund.

To answer your specific question, I would sell all the ZM, take the gains and the one-time tax hit, and then re-invest all the remainder in the types of funds I mentioned above. You (and he) will likely be FAR better off over the long run with a boring, steady flow of investment dollars into broad-based, low-cost total market funds than with any "luck of the draw" individual stock picks.

 

[target2019]

I would sell enough to stay within the 12% for tax free gains.

Your next bet may not be so great, though.

 

[Guamaniac]

Thanks for the replies. I do appreciate the point about index funds as he does have that. Over the years I've had success with some individual investing when opportunities arise but I never expected the result from this one investment. I know it's generally not a great idea to pick winners but it's worked for me over many years and I'll probably continue to do it. Even in my son's accounts.

I do think I can get better returns than the 15% but get stuck on the "free money" part of zero cap gains tax. I guess I don't have to immediately decide and can always sell and accept the 15% tax if I get fed up with the performance.

 

[Dash man]

Just how much of your son's portfolio is in ZM as a percentage? If it's a large portion, I'd take the tax hit just because of too much concentration in one stock. If it's 10% or less, I'd just sell just enough to stay in the 12% bracket.

 

[ERD50]

... I know it's generally not a great idea to pick winners but it's worked for me over many years and I'll probably continue to do it. Even in my son's accounts. ...

I don't know the level of your son's disabilities, but is he able to understand the "prudent man principle"? Do you?

A stock buying plan that "has worked for many years" is unlikely to meet that criteria. And while I'd bet that most of us on this forum are all/mostly in broad, diversified accounts (and largely passive management), if we were investing for someone else, we'd be even more concerned about diversification.

To be blunt, I am shocked that you are risking the future of someone with disabilities to your hunches in the stock market.

What % of his portfolio is in individual stocks, or sector funds?

-ERD50

 

[triangle]

Generically speaking, I would certainly sell as much that would fit under 0% long term gains.

I am biased in that I think Zoom is overvalued given all the video conferencing alternatives, so I would sell and take the nice gain and taxes that came with it. Taxes are not really so bad in that you will have reset the account to a higher basis, so that any future selling will report a lower gain.