Taxes Should Affect Your Stock Decisions
You bought shares of That Next Great Thing Corp. and they were right, they were that next great thing and their shares quadrupled in six months. You’ve been high-fiving all your co-workers and buying birthday cakes for your dog (and it isn’t even Fido’s birthday) but you’re starting to get worried that the fad will soon end. You want to sell but you don’t want to pay that nasty capital gains tax so should you hold on a little while longer?
You bought $100,000 worth of TNGT, which appreciated to $400,000 for a capital gain of $300,000. This is how the taxes would shake out depending on your tax bracket if you were to sell it all.
| Tax | Taxes Owed | Difference | % | |
| Bracket | Short Term | Long Term | ||
| 10% | $30,000 | $15,000 | $15,000 | 3.75% |
| 15% | $45,000 | $15,000 | $30,000 | 7.50% |
| 25% | $75,000 | $45,000 | $30,000 | 7.50% |
| 28% | $84,000 | $45,000 | $39,000 | 9.75% |
| 33% | $99,000 | $45,000 | $54,000 | 13.50% |
| 35% | $105,000 | $45,000 | $60,000 | 15% |
The percent column represents how much of your share’s value is lost by selling now instead of in six months, so, if you’re in the 35% bracket and you anticipate the stock will fall more than 15% in the next six months then you should sell it now.
You shouldn’t let the tax implications of your sale significantly affect your decision (if you think the reasons why you bought the shares no longer apply, then you should get out) but it should be playing a role in your decision-making process. Don’t be the one left holding the bag because you became greedy and didn’t want to pay the tax man.
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There are 12 comments, add your thoughts now!
I searched TNGT on all markets and I dont see it.
lies.
but good reminder. if the reason why you bought it no longer applies, its probably time to bail out.
Sometimes some people just can’t see The Next Great Thing.
Jim,
Shouldn’t the long term and short term columns be switched around?
Whoops, thanks JLP, it’s been fixed.
“You shouldn’t let the tax implications of your sale significantly affect your decision (if you think the reasons why you bought the shares no longer apply, then you should get out) but it should be playing a role in your decision-making process. Don’t be the one left holding the bag because you became greedy and didn’t want to pay the tax man.”
I learned this lesson the hard way during the dot com meltdown. I had a few stocks, including AOL, with some nice gains and I know things were going downhill for Internet stocks. However, I owned most of them for less than a year, plus my tax rate was much higher than normal that year, so I waited. Let me just tell you, I’ll never wait again.
The best thing to do is just use IRA, Roth IRA, Coverdell ESA, etc. to avoid short term tax issues in the first place if you can.
[...] Well, it’s Friday and that means it is time to wrap up the week in posts. I don’t have time to mention every great post out there. However, here are some of my favorites from the past week: Hard to believe it is tax time again. Yeah, sure we have four months until taxes are due. However, now is the time to be thinking about your 2007 taxes. Jim at Blueprint has a great post Taxes Should Affect Your Stock Decisions. To avoid all that, set up a Roth IRA. [...]
My New Years resolution is to pay over $100,000 in taxes
Seriously, I’ve had clients make some incredibly bad decisions by fearing to pay taxes-Good reminder! Steve
Carnival of Investing
Welcome to this week’s edition of the Carnival of Investing. As a summary of each piece, I’m listing each author’s reason for submitting the post to the carnival (for those that submitted one) and/or a bit of the post itself
[...] Free Money Finance is hosting the Carnival of Investing in which my article about how taxes should play a role (but not be a sole deciding factor) in investment decisions received top billing in a Carnival weighing in at eighteen articles. FMF did an excellent job hosting it this week. [...]
This Week’s Carnival of Investing
I’m a day late, but This week’s Carnival of Investing is being hosted at FreeMoneyFinance. It’s arelatively new Carnival, and worth checking out. Here are some of the this week’s pieces I found interesting:
I generally agree that you shouldn’t let tax considerations prevent you from selling stuff that deserves to be sold.
On the other hand, if you’ve held on the something for 11 months it might be prudent to hold on for one more month.
Big Mike - Yes it might be prudent… depending on your tax bracket and how you think it’ll perform, hence the chart. If you’re in the 28% tax bracket and you think it’ll fall more than 9.75% then you should sell… having hard numbers makes it an easier and less nebulous decision. Of course, who knows where a stock will go, right?
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