Capital Gains Help

[captain3d]

Hi All

My tax person is off for the holidays so it is over to you...

I am sitting on $600k, short term, unrealised capital gains that I think I will sell Q1 or Q2 next year.

I am thinking to sell half this week (and rebuy) to step up the basis and spread the tax burden over two years. I have no other income, losses or withdrawals.

Is this a good idea?

All opinions welcome.

 

[Texas Proud]

Sounds trollsh to me...


But, it is smart to spread the tax burden over two years instead of one year zero and the other the full amount...


The big question would be, how long until it is a long term gain..

 

[captain3d]

No Trolling. The investment went up unexpectedly quickly and has a reputation of doing the opposite even faster. LT would be end of the year which I think will be too far out.

Thanks for confirming it is basically sound thinking. eg catching two years worth of the zero and lower brackets cant do any harm.

I did just read this also...
https://www.bogleheads.org/wiki/Tax_gain_harvesting

"Tax gain harvesting, as opposed to tax-loss harvesting, is the process of turning unrealized long-term capital gains into realized capital gains at a specific time for tax purposes."

 

[DrRoy]

Wait for it to become long term. The taxes will be so much less.

 

[pb4uski]

No Trolling. The investment went up unexpectedly quickly and has a reputation of doing the opposite even faster. LT would be end of the year which I think will be too far out.

Thanks for confirming it is basically sound thinking. eg catching two years worth of the zero and lower brackets cant do any harm.

I did just read this also...
https://www.bogleheads.org/wiki/Tax_gain_harvesting

"Tax gain harvesting, as opposed to tax-loss harvesting, is the process of turning unrealized long-term capital gains into realized capital gains at a specific time for tax purposes."

End of 2023 or end of 2024? If 2023, then I would wait. If 2024 then I might consider buying a put that expires after the stock has been held a year to protect the unrealized gains.

 

[TheWizard]

If/when you sell half, you'll have $300k of STCG which is taxed as Ordinary Income.
You'll be paying a lot of tax on that.
I would only tax gain harvest a smaller amount each year, and probably after they've gone Long Term

Remember that taxable investments eventually get stepped up basis for your heirs...

 

[captain3d]

LT would be end of 2024. If we presume I will sell before LT then splitting the gains across two years seems justified.

I had not thought of the Put idea. Thanks. I will have a think about that. But the idea is to get to LT with insurance against the gains disappearing. Seems wise.

 

[Sunset]

OP - Short term capital gains are taxed as ordinary income, so you will pay a lot of taxes with $300K income (plus your normal income) just to step up basis.

What is this item ? as there are special cases where the taxation never qualifies for long term capital gains.

 

[captain3d]

Regarding the protective put idea I just read this.

“ If the shares have been held for less than a year (say eleven months) and the trader purchases a protective put, even with more than a month of expiry left, the trader's holding period will immediately be negated. Any gains upon the sale of the stock will be short-term gains.“

So the the Put prevents the stock achieving LT status? Buying the Put equals selling the stock while it is ST.

If I understand that correctly then I would need to buy the Put on a similar but not identical investment to allow the original shares to achieve LT status. Correct?

Edit: reading more I understand the protective put would reset the holding period of the stock. So the underlying stock would become LT one year after purchasing the put.

 

[pb4uski]

I do recall there were some tricky things with the protective put, but if there is a very similar stock in the same industry then that can be used but obviously is not perfect protection.

So if you bought a protective put on that same ticker with a term of a little more than a year then from what you wrote it sounds like that would work.

Obviously a tricky area so talk with your tax advisor. Or your broker may be able to provide advice and then confirm it with your tax advisor before proceeding.

So from what you wrote it sounds like you very recently bought the stock and it popped? If so, congratulations.

 

[captain3d]

What is this item ? as there are special cases where the taxation never qualifies for long term capital gains.

Leveraged stock ETFs eg UPRO and Crypto. So they would become LT if I wait.

 

[captain3d]

So if you bought a protective put on that same ticker with a term of a little more than a year then from what you wrote it sounds like that would work.

So from what you wrote it sounds like you very recently bought the stock and it popped? If so, congratulations.

Thanks. The gains have come since Oct. I am starting to understand the put limits and think it could work out well as a way to get to LT with downside protection.

As some of this is crypto I could buy Puts on related ETFs like BITO or stocks like MSTR, MARA or COIN.

I have a busy day ahead reading

 

[SecondCor521]

You might also read up on NIIT, which you might owe in addition to the capital gains taxes. It's "only" 3.8% though.

There is also an additional Medicare tax that applies at that level of income, but I *think* that's only on earned income. You seem capable of reading up on this, so I'll leave it in your capable hands

 

[dmpi]

Wait for it to become long term. The taxes will be so much less.

+1. That's what I would do, hang on until you can get long term gains.

 

[captain3d]

You might also read up on NIIT, which you might owe in addition to the capital gains taxes. It's "only" 3.8% though.

There is also an additional Medicare tax that applies at that level of income, but I *think* that's only on earned income. You seem capable of reading up on this, so I'll leave it in your capable hands

Ah yes I see that will kick in above $250k Married Filing Joint

 

[captain3d]

+1. That's what I would do, hang on until you can get long term gains.

More testing. According to this capital gains calculator (Inc California State Tax).
https://smartasset.com/investing/capital-gains-tax-calculator#61dBqMySCV


With no other income except capital gains. The tax bill (Married) is projected at:

.............LT in 1y......vs....ST Split 2y
100k.........$2,666.............$5,980
200k.......$24,302............$22,130
300k.......$50,498............$49,214
400k.......$78,598............$80,514
500k......$106,698..........$113,486
600k......$137,095..........$150,456


It surprised me how close they were especially around the $400k mark.

 

[captain3d]

I might consider buying a put that expires after the stock has been held a year to protect the unrealized gains.

My stumblings around the TD Ameritrade option order screen does not seem to provide an economical Put option. Just too expensive. Here is an example in case I am getting this completely wrong...

SPY x 1200 shares ($473) = $568k value
Put x 12 Contracts for Jan 2025, Strike $475 = $30,692

BITO x 26,500 ($21.44) = $568k value
Put x 265, 1/25, $21 = $212,172

COIN x 3200 ($176) = $563k value
Put x 32, 1/25, $175 = $163,220

I have never bought options

 

[pb4uski]

Just thinking out loud but what it you shorted a similar security? If the market goes down then you lose some of your unrealized appreciation on the long side but make money on the similiar short position and the inverse if the market goes up, you gain on the long side but lose on the short side.

From what I'm reading you can't do it for the same ticker but perhaps you coudl do it for similar tickers. However, from post 16 t doesn'seem like the tax difference is significant enough to be worth the effort/hassle.

https://www.investopedia.com/terms/s/sellagainstthebox.asp

Again, check with your broker and/or tax advisor.

 

[captain3d]

Just thinking out loud but what it you shorted a similar security?

From what I'm reading you can't do it for the same ticker but perhaps you coudl do it for similar tickers. However, from post 16 t doesn'seem like the tax difference is significant enough to be worth the effort/hassle.

https://www.investopedia.com/terms/s/sellagainstthebox.asp

Again, check with your broker and/or tax advisor.

I am on here because my Tax advisor is on holiday

It does seem like The two year split and some simple stop losses maybe the best answer. Maybe the second half can hang on for LT status.

Or mix it all. Sell a bit ST, Put a bit, Stop loss a bit.

Thanks All.

 

[pb4uski]

I am on here because my Tax advisor is on holiday ....

They don't work on holiday weekends? Slackers!

 

[Texas Proud]

One of the problems with buying something 'similar' is that it might not be as similar as you want... and it could end up costing you a lot more than paying taxes at ST rates..


Sometimes it is just better to close out the position and pay the taxes and book the gain...

 

[joesxm3]

For the leverage tech ETF why not buy some inverse leverage tech ETF to go neutral with position.

For the crypto, sell half now and make a plan to exit the rest in layers during next year.

Just an idea from some guy on the internet

 

[Closet_Gamer]

More testing. According to this capital gains calculator (Inc California State Tax).
https://smartasset.com/investing/capital-gains-tax-calculator#61dBqMySCV


With no other income except capital gains. The tax bill (Married) is projected at:

.............LT in 1y......vs....ST Split 2y
100k.........$2,666.............$5,980
200k.......$24,302............$22,130
300k.......$50,498............$49,214
400k.......$78,598............$80,514
500k......$106,698..........$113,486
600k......$137,095..........$150,456


It surprised me how close they were especially around the $400k mark.

You're getting good and interesting advice in this thread.

The only thing I would add is this:
"Don't let the tax tail wag the investment dog."

You are in a very volatile set of securities. That's why the put option is so expensive. Provided your tax analysis is correct, the spread between the two sale approaches is quite small compared to the absolute amount of money invested. Just a point or two.

While being tax savvy is important to net returns, the market isn't going to wait for you to optimize your tax situation. If the right thing to do is get out of the investment, then get out.

My $0.02.

 

[4legsgood]

...
The only thing I would add is this:
"Don't let the tax tail wag the investment dog."
...

+1

Sounds like your portfolio might currently be outside 'sleep well at night' risk, and that's no fun.

 

[captain3d]

Thanks all. We are happy with the overall balance of the portfolio. The sleep factor is doing ok.

I have decided to sell and rebuy a portion of the crypto to generate $300k approx cap gains. That may also give some flexibility to the accountant choosing between first in first out or last in first out.

Good luck with 2024 everyone. I was sure this year was going to be bad but I was wrong.