Which stocks/funds to sell?

[disneysteve]

I want to sell off some of the stock holdings in our taxable accounts. All have some degree of unrealized capital gains so there's no tax loss harvesting to do. No matter what we sell, there will be taxes to pay, which is fine. I'm trying to figure out the best approach. For various reasons, like ACA, I don't want to realize more than about 25K in capital gains from the sales this year.

We own 2 taxable mutual funds that we've had for up to 30+ years, worth 140K and 225K. The problem with selling any of those shares is that I don't have total cost basis info. They weren't required to track it back then. I'm pretty sure I have all or nearly all statements from day one but it would be a monumental task to figure out the basis. I suppose I could specify individual lots to sell since I could use the old statements to know how much was paid for each lot. Would that work? But what about reinvested earnings over the years? Does that alter the basis of individual lots or just the overall account?

I own 3 individual stocks which I inherited 4 years ago. I should have sold them right away at the stepped up basis but I didn't so here we are. The 3 stocks are worth a total of nearly 500K. One of the 3 makes up 335K of that and has grown tremendously since I inherited it. I do know the cost basis for all 3 stocks since it is their value at the time I got them. I could liquidate some of those shares.

We also own 1 index mutual fund (515K) and one high dividend ETF (145K) and we do have cost basis info for those holdings.

How would you go about choosing what you sell? My preference is to reduce the holdings of the 30-year-old mutual funds because they throw off a lot of taxable capital gains each year which always screws with our taxes at the end of the year so if that's a feasible option, I'd pick that.

Any help would be appreciated.

 

[Sunset]

I see the cost basis issue being a problem like you said for selling the mutual fund since you are concerned about the ACA and 25K amt.

If it's just a few years to go, until no ACA issue, then I'd go with the 3 stocks.
These are risky in the sense that they are single companies (?) and could lose a lot of value for some reason. An example that happened to me, was I bought a stock , and a week later the CEO was charged with fraud ! There is no way I could have figured that out from examination of public info.

Not sure if you can sell lots in a mutual fund.

 

[sakowitzm]

This may sound like trying to skirt the law, and I may get crucified for suggesting this. I accept that and I'm actually interested in what others think. I'm fairly certain that the IRS has no better information than you about the cost basis, and therefore no legitimate way to question what you report. You might make your "best guess" by looking up what the prices were around the time you bought, and using that as your cost basis. I'm ready for the flames.

 

[SecondCor521]

I want to sell off some of the stock holdings in our taxable accounts. All have some degree of unrealized capital gains so there's no tax loss harvesting to do. No matter what we sell, there will be taxes to pay, which is fine. I'm trying to figure out the best approach. For various reasons, like ACA, I don't want to realize more than about 25K in capital gains from the sales this year.

We own 2 taxable mutual funds that we've had for up to 30+ years, worth 140K and 225K. The problem with selling any of those shares is that I don't have total cost basis info. They weren't required to track it back then. I'm pretty sure I have all or nearly all statements from day one but it would be a monumental task to figure out the basis.

Yes, it would be, depending on how frequently you purchased lots, including lots purchased with dividends via dividend reinvestment.

I suppose I could specify individual lots to sell since I could use the old statements to know how much was paid for each lot. Would that work?

Yes, but there are requirements. See the IRS instructions for Schedule D, Form 8949, and maybe Pub 551 (basis of assets). At the very least:

1. You will have to contact your brokerage company holding your taxable account and change your cost basis method to Specific ID *before* you sell.
2. After step 1, when you go to sell, you'll need to identify to your brokerage company which lots you are selling.
3. Step 2 might require you providing the lot information to the brokerage company.

Even though you bought the shares a long time ago and the brokerage firm was not required to track cost basis information, they may have tracked it anyway. Check with them.

But what about reinvested earnings over the years? Does that alter the basis of individual lots or just the overall account?

Reinvesting dividends does not change the cost basis of the original lot. It creates a new lot. For example, let's say you bought 100 shares of a mutual fund at $50 a share on January 4, 1974. That lot has a cost basis of $5000. The mutual fund then pays a dividend of $2 a share on July 12, 1974. You own 100 shares, so your dividend payment is $200, which buys you an additional four shares at $50 per share. (The prices obviously would be different seven months apart, but let's keep it simple.)

So now you have two lots:

Lot 1: Purchase date 1/4/74, 100 shares, cost basis $5000.
Lot 2: Purchase date 7/12/74, 4 shares, cost basis $200.

You can have the situation where you have multiple lots that you bought that combine to pay a dividend that can be reinvested to create a single additional lot. That's OK too.

Oh, and the lots that were purchased with dividends also produce dividends. With a mutual fund those are probably lumped together per the previous paragraph. But I had a stock DRIP that kept them separate, so my lots really proliferated and it got rather silly rather fast.

Bottom line, though, each purchase is a separate lot with it's own basis, and you may have dozens or hundreds or even thousands of them.

I own 3 individual stocks which I inherited 4 years ago. I should have sold them right away at the stepped up basis but I didn't so here we are. The 3 stocks are worth a total of nearly 500K. One of the 3 makes up 335K of that and has grown tremendously since I inherited it. I do know the cost basis for all 3 stocks since it is their value at the time I got them. I could liquidate some of those shares.

We also own 1 index mutual fund (515K) and one high dividend ETF (145K) and we do have cost basis info for those holdings.

How would you go about choosing what you sell?

My simple rule is sell the thing I own that I like the least. If I like everything I own, I consider secondary considerations like tax impacts and asset allocation.

My preference is to reduce the holdings of the 30-year-old mutual funds because they throw off a lot of taxable capital gains each year which always screws with our taxes at the end of the year so if that's a feasible option, I'd pick that.

Any help would be appreciated.

If you were trying to raise a certain amount of cash, say, to buy a car or house, then I'd include in the consideration the relative amount of unrealized capital gain so I could both (a) raise the amount of cash I needed and (b) hit my $25K capital gains tax limit that you mentioned at the beginning.

Since it sounds like that's not a consideration, I'd just go based on tax impacts and asset allocation.

...

If the brokerage company doesn't have the basis and you don't want to recreate it, the IRS always allows you to use a basis of $0. Other options include donating the stock to charity - you get the deduction for the full value of the stock at donation time, and they don't have to pay the capital gains. Another option you probably wouldn't like but would be to hold them until death, then the basis gets reset to FMV (under current law anyway).

You're also allowed to reconstruct cost basis using reasonable estimations as alluded to by the poster above. But if you have actual records I'd be inclined to use those since you have it and it's actually accurate.

 

[PaunchyPirate]

Something to consider… For the mutual funds, have you ever sold any shares? If you did, if you, or your broker, defaulted to average cost accounting at that time, then your cost for all the shares held at the time of that sale need to reflect that same average cost. You’re not allowed to now use individual lot costs from time of purchases.

 

[SecondCor521]

Something to consider… For the mutual funds, have you ever sold any shares? If you did, if you, or your broker, defaulted to average cost accounting at that time, then your cost for all the shares held at the time of that sale need to reflect that same average cost. You’re not allowed to now use individual lot costs from time of purchases.

The rules have changed in this regard. It is now possible to sell shares using average cost, then switch back to specific ID. See the IRS instructions and publication mentioned earlier for information.

 

[disneysteve]

If it's just a few years to go, until no ACA issue, then I'd go with the 3 stocks.
These are risky in the sense that they are single companies (?) and could lose a lot of value for some reason.

I had that thought, too. There's also always the question of "would I buy these stocks today had I not inherited them?" and the answer to that is no, I wouldn't. With rare exception, we don't buy individual stocks. It's probably all around simpler to draw from those stocks.

And yes, we're only a few years from Medicare.

 

[pb4uski]

Are the mutual funds that you would like to sell with a broker or with the fund companies? What do they show the basis is? Have you had dividends reinvested in these funds? Have you made any big dump-ins of money to either of the funds.

Depending on what is available from the custodian, since you want to sell the nutual fund shares, if those shares are still eligible for specific identification, I might take the statements and work backwards from today until I get the $25k of gains that you are seeking to achieve.

Then you can make yourself a little project to do an analysis of the basis for your future use.

I had to do something similiar for an aunt and it was a real PITA.

 

[PaunchyPirate]

The rules have changed in this regard. It is now possible to sell shares using average cost, then switch back to specific ID. See the IRS instructions and publication mentioned earlier for information.

Correct. But the remaining lots from before the sell transaction now all share the same per share average cost as was determined during sell transaction. So referring back to the original statement for cost per share is no longer valid to do. You are free to identify individual lots to sell. But they all have the same per share cost. Lots from after the transaction will have their own cost per share unless there was another sale done at average cost.

 

[disneysteve]

Are the mutual funds that you would like to sell with a broker or with the fund companies? What do they show the basis is? Have you had dividends reinvested in these funds? Have you made any big dump-ins of money to either of the funds.

Depending on what is available from the custodian, since you want to sell the nutual fund shares, if those shares are still eligible for specific identification, I might take the statements and work backwards from today until I get the $25k of gains that you are seeking to achieve.

Then you can make yourself a little project to do an analysis of the basis for your future use.

I had to do something similiar for an aunt and it was a real PITA.

One fund is with the fund company. The other was with the fund company but a few years ago I moved it into our Vanguard account. The one with the fund company should be the easier one to deal with. I like the idea of working backwards from the statements to come up with the amount I'm looking to get to.

So let's say I want to go that route. Do I make my list of lots and then reach out to the fund company?

I'm 99.9% sure that we did sell some shares of that fund very early on when we bought our house in 1994 but we continued to DCA into that fund for years after that. As long as I use specific ID for lots purchased after that it sounds like I'd be fine.

 

[SecondCor521]

Correct. But the remaining lots from before the sell transaction now all share the same per share average cost as was determined during sell transaction. So referring back to the original statement for cost per share is no longer valid to do. You are free to identify individual lots to sell. But they all have the same per share cost. Lots from after the transaction will have their own cost per share unless there was another sale done at average cost.

That sounds right and I believe you. I haven't looked at those particular rules for a while now because they don't apply to me or my family.

 

[pb4uski]

One fund is with the fund company. The other was with the fund company but a few years ago I moved it into our Vanguard account. The one with the fund company should be the easier one to deal with. I like the idea of working backwards from the statements to come up with the amount I'm looking to get to.

So let's say I want to go that route. Do I make my list of lots and then reach out to the fund company?

I'm 99.9% sure that we did sell some shares of that fund very early on when we bought our house in 1994 but we continued to DCA into that fund for years after that. As long as I use specific ID for lots purchased after that it sounds like I'd be fine.

The thing that I don't know the answer to and you can ask the fund company is if they report basis to the IRS and if so, how. If what they report works for you you migh save yourself a lot of effort.

Also, see what they can provide in terms of your purchase lots and basis. Even if you have to pay them a little for their efforts if you can get information you need and can provide to the IRS it might be worth the cost/effort.

Morbid thought, but gift it to a family member on their deathbed and have then make you their beneficiary. Just kidding.

 

[SecondCor521]

Morbid thought, but gift it to a family member on their deathbed and have then make you their beneficiary. Just kidding.

Other taxpayers have had the same thought, and there's now a rule in place which prevents this maneuver. I forget what the timeframe is - I think it's a year or two - but if it's within the timeframe then the basis step up is disallowed.

 

[pb4uski]

Makes sense. To be honest, I think step up in basis is intellectually flawed. It doesn't make sense that huge gains should be totally untaxed. I wonder how much that costs the Treasury each year. Just googled it...$44 to $54 billion annually!

 

[Koolau]

This may sound like trying to skirt the law, and I may get crucified for suggesting this. I accept that and I'm actually interested in what others think. I'm fairly certain that the IRS has no better information than you about the cost basis, and therefore no legitimate way to question what you report. You might make your "best guess" by looking up what the prices were around the time you bought, and using that as your cost basis. I'm ready for the flames.

The problem is that the IRS doesn't have to "refute" your basis. All they have to do is question it and insist that YOU explain it to them. If they disagree, you could have tax "issues."

 

[tulak]

Apologies if I missed it, and not directly related as to what to sell, but another thought is to take a bigger hit this year - or next - and lose on subsidies/taxes, to make sure you can stay in a lower bracket in subsequent years. You’d have to model it out to see if it makes sense.

 

[marinauser]

The mutual funds' cost basis is never going to get any better. So, unless you intend to die before you ever sell, I would get as good of an estimate of the cost as you can and sell enough of that to hit the $25k capital gain mark you are shooting for. I do think you need to look at your asset allocation and see how these stocks and other holdings figure into your overall allocation goal and see if you are not over concentrated and need to make some changes just to sleep at night - ACA or no ACA - don't let the ACA issue drive you into bad investment decisions where you lose more that you ever gain from ACA.

 

[sakowitzm]

The problem is that the IRS doesn't have to "refute" your basis. All they have to do is question it and insist that YOU explain it to them. If they disagree, you could have tax "issues."

Yes, certainly this is true. What would you say is the likelihood of the IRS questioning what you report? One in 10,000?

 

[Koolau]

Yes, certainly this is true. What would you say is the likelihood of the IRS questioning what you report? One in 10,000?

I have no clue. Maybe folks here who state basis every year on multiple sales of equities would be willing to chime in with how often they are asked to explain their stated basis.

 

[SecondCor521]

Yes, certainly this is true. What would you say is the likelihood of the IRS questioning what you report? One in 10,000?

From Compliance presence | Internal Revenue Service Table 17 it looks like the IRS "examines" between 1 out of 1000 and 1 out of 250 at what I consider typical income ranges in 2021. It is much higher at incomes over $5M.

 

[disneysteve]

We own 2 taxable mutual funds that we've had for up to 30+ years, worth 140K and 225K. The problem with selling any of those shares is that I don't have total cost basis info.

So it turns out that one of the two funds I mentioned does have complete cost basis info going back to day one. That makes this a much easier decision. Plus it happens to be the fund that dishes out the largest capital gains surprise each December. I would love to reduce our exposure to that fund. Our total unrealized gain is about $111,000 so we can easily sell just enough to target the 25K in capital gains that I'd like to limit it to. I'll run it by our CPA before I pull the trigger but unless he sees a flaw in the plan, that's probably what I'll be doing.

Thank you for all of the input.