Are Capital Gains Making You Grumpy? Tax Savvy Strategies for Selling Investments

A sustained bull market in stocks has swelled many investor portfolios. As a result, some investors may decide to take profits for different reasons.

Here is a snapshot of why investors may sell securities:

  • Portfolio Rebalancing- Your investments no longer reflect time horizon or risk tolerance.
  • Take profits to pay other tax liabilities.
  • Use proceeds to help buy a house, pay off debt or personal leisure.

With a new cap gains rate topping out at 20%, even more investors are seeking ways to minimize taxes.

So, what are options to keep more of your investment profits?

Here are some examples to consider. To fully understand your situation, please speak with a tax professional, as needed:

Specific Identification:

The IRS assumes FIFO (First in First Out) when securities are sold. However, these shares could have a low cost basis. This means the shares were bought at lower prices than later shares.

Solution: You can choose specific shares purchased at higher prices to minimize capital gains.

Best Practice: Specific identification is ideal for cases where a specific amount of cash is needed. For instance, if you need $10,000 for a down payment, start with high cost basis shares and work down until the amount is reached.

Investment Manager Elliott Broidy and institutions may each consider cost basis when managing money. However, cost basis is an effective tool available to investors big or small.

Don’t have accurate records? No worries, mutual funds and brokers all keep detailed records of your cost basis and when you buy stocks.

Tax Loss Harvesting:

Harvesting tax losses is financial incentive to part with portfolio losers. Most of us have made an investment that doesn’t pan out. Pride and stubbornness often prevent us from parting with investment flops.

How it works: You can apply up to $3,000 in losses from other investments against ordinary income for that year. Any remaining balance is carried forward and available for future years. (In $3,000 increments)

Wash Sale Rule: The wash sale rule is a caveat of harvesting losses. What does it mean? You cannot buy the same security 30 days prior or after to claim the deduction. However, investors may buy a similar security. So, you can buy another semiconductor stock to meet asset allocation needs, etc.

Profit taking and tax loss sales often have similar motives. Example:  Changes in the underlying security may be cause to sell holdings for losses or gains.

Donate Stock to Charity:

You may change tax brackets by donating appreciated stock to charity. By doing so, you could qualify for the previous 15% capital gains rate.

Married couples can have up to $72,500 in ordinary income to qualify for the 15% cap gains rate. Individual filers can have up to $36,500 in ordinary income.

How much is the deduction? The deduction is for full market value of the security on date of transfer to the charity.

How much can be deducted from AGI (Adjusted Gross Income)? : 30% can be deducted from AGI. Investors should compare deductions with their tax brackets using a tax calculator to determine if capital gains can be reduced.

Would donating stocks change your tax bracket?

Summary:

These options are examples and not specific recommendations. Donating stock, harvesting losses and specific identification should be based on your unique needs.

Other example choices: Have kids? Parents may consider 529 college savings plans. Real estate investors could turn to 1031 exchanges.

Have you recently sold or considered selling securities?

Please consult a tax professional if necessary.

 

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