Capital gains tax

[UnrealizedPotential]

I was just curious how others feel about the gains or losses they make on their investments. For example, lets say someone makes 100k gain in their taxable stock fund, etf,whatever. If one doesn't sell the account, then they owe no capital gains tax on the 100k? Is this correct? If it is, then does selling a little each year to diversify further make sense or no? Or if the fund or stock is well liked, does anyone hold on to it, planning never to sell and thus incur no capital gains tax, except for the year end distribution, if any?

 

[MrLoco]

I was just curious how others feel about the gains or losses they make on their investments. For example, lets say someone makes 100k gain in their taxable stock fund, etf,whatever. If one doesn't sell the account, then they owe no capital gains tax on the 100k? Is this correct? If it is, then does selling a little each year to diversify further make sense or no? Or if the fund or stock is well liked, does anyone hold on to it, planning never to sell and thus incur no capital gains tax, except for the year end distribution, if any?

There are a lot of "what if's" and "it depends" as related to the scenario you describe. Probably a key factor would be ...."Does the $100k in gains throw one's asset allocation out of balance? Is it time to rebalance?"

If one rebalances by selling some or all of the investment then a capital gains tax is owed. Just make sure you have held the investment longer than 1 year so you pay long term capital gains tax and NOT short term ( which is taxed as ordinary income).

Of course, a better scenario if one's AA is out of balance, might be to rebalance in one's tax deferred accounts so as not to incur ANY immediate tax consequences. For example, I needed to rebalance 6 months ago and moved a health care fund to a Total bond Index Fund fund in my Trad. IRA.
This accomplished 2 goals. I was able to rebalance so my AA was in line with my long term goals AND I was able to do this in my IRA as to avoid any immediate taxes due. Also I was in this particular health care fund for over 20 years and the returns were stellar, but I felt it was time to get out of this sector fund as no matter who was elected ....drug companies and bio tech was going to become a target for politicians. Seems I was right.

Just remember, in your scenario even if you never sell the asset....you will still owe taxes on any dividend income as well as capital gains distributions every year. One reason why many retirees switch from reinvesting dividends to having them paid out in cash as they will be taxed no matter what in a taxable account.

 

[LOL!]

I was just curious how others feel about the gains or losses they make on their investments. For example, lets say someone makes 100k gain in their taxable stock fund, etf,whatever. If one doesn't sell the account, then they owe no capital gains tax on the 100k? Is this correct? If it is, then does selling a little each year to diversify further make sense or no? Or if the fund or stock is well liked, does anyone hold on to it, planning never to sell and thus incur no capital gains tax, except for the year end distribution, if any?

I only own well-diversified index funds and quite a few have over $100K in gains. I would not sell any to be more diversified since they can't get more diversified than they already are.

Whether one incurs capital gain tax will depend on one's taxable income and marginal income tax bracket. It seems like you are thinking of something called tax-gain harvesting when one has low income and pays a 0% long-term capital gain tax rate. See this article: https://www.bogleheads.org/wiki/Tax_gain_harvesting

Yes, that would be a good thing to do, if your circumstances let you do it. And of course it only applies to assets held in a taxable account and not in an IRA or 401(k).

 

[scrabbler1]

I have different AAs in my taxable account versus my IRA. In my taxable account, I have a wider range of acceptable balance in its AA so I rarely make any moves there and incur far fewer realized cap gains/losses. In my IRA, I have made several moves over the years to rebalance the account, and its AA gradually changes over time to become slightly less stock-heavy. And, as others have pointed out, the rebalancing moves in an IRA do not incur any cap gains taxes.

 

[pb4uski]

I was just curious how others feel about the gains or losses they make on their investments. For example, lets say someone makes 100k gain in their taxable stock fund, etf,whatever. If one doesn't sell the account, then they owe no capital gains tax on the 100k? Is this correct? If it is, then does selling a little each year to diversify further make sense or no? Or if the fund or stock is well liked, does anyone hold on to it, planning never to sell and thus incur no capital gains tax, except for the year end distribution, if any?

Yes, it is correct that if you don't sell then you don't have a realized gain and don't owe capital gains tax. However, the capital gains rate is 0% for taxpayers in the 15% tax bracket or lower.

I don't see where selling a little each year makes sense unless you like to voluntarily pay taxes... unless you are in the 15% bracket so your cost is 0.

My buy/sell decisions are principally based on rebalancing.

 

[walkinwood]

I was just curious how others feel ...Or if the fund or stock is well liked....

I feel that it is good to only have funds or stocks that I like a lot in my portfolio.

 

[joylesshusband]

Not owing capital gains tax was covered pretty well in the above posts.

However, the very near future may differhttps://www.bloomberg.com/view/arti...-aimed-at-the-middle-class-not-rich-investors

 

[audreyh1]

I accept tax hits from rebalancing because it's important to me to maintain my risk profile (the target AA), However, I do take actions to lower the tax impact. I sell higher basis stuff if I can. If the AA is just slightly off I don't bother. If I am planning to gift to a charitable fund anyway, I'll gift shares as part of my rebalancing. I tax harvest loses when given an opportunity.

 

[MichaelB]

Just a reminder, we have asked to put off discussion of potential changes to tax laws until there is actual legislation under consideration.