Which lots do you sell when redeeming shares?

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nobsinvestor
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Which lots do you sell when redeeming shares?

Post by nobsinvestor »

Hi All,

Let's say you had a major expenditure and wanted to redeem some of your stock shares to pay for it.

Let's say your only stock holding is VTI, the Total US Stock Market ETF.

You have 3 lots of VTI:

500 shares purchased at $40.00 per share
500 shares purchased at $60.00 per share
200 shares purchased at $100 per share (around the current market price)

Now let's say you want to redeem 200 shares, or about $20,000 at the current market price.

Which lots do you sell? I'm assuming the most recent one purchased at $100 so that you have no capital gains tax to pay, right?
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mhc
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Re: Which lots do you sell when redeeming shares?

Post by mhc »

You've got it. Sell the ones with the least tax burden unless you would not have to pay cap gains taxes due to your tax bracket.
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rkhusky
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Re: Which lots do you sell when redeeming shares?

Post by rkhusky »

mhc wrote:You've got it. Sell the ones with the least tax burden unless you would not have to pay cap gains taxes due to your tax bracket.
Then you may want to realize some cap gains (sell shares with lower cost basis), up to the limit where they become taxable.
kaneohe
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Re: Which lots do you sell when redeeming shares?

Post by kaneohe »

rkhusky wrote:
mhc wrote:You've got it. Sell the ones with the least tax burden unless you would not have to pay cap gains taxes due to your tax bracket.
Then you may want to realize some cap gains (sell shares with lower cost basis), up to the limit where they become taxable.
so holding period (>1 yr?) may become important since LTCG (but not ST) have the favorable rates.
placeholder
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Re: Which lots do you sell when redeeming shares?

Post by placeholder »

It should be the shares with the least tax impact but in my case I have lots of carry over losses so it's not as important whether it's long term or short term gains.
livesoft
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Re: Which lots do you sell when redeeming shares?

Post by livesoft »

Sell shares with a loss first. Holding period won't matter, but short-term losses are more versatile than long-term losses on your tax return, so one may consider them "better".
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nobsinvestor
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Re: Which lots do you sell when redeeming shares?

Post by nobsinvestor »

livesoft wrote:Sell shares with a loss first. Holding period won't matter, but short-term losses are more versatile than long-term losses on your tax return, so one may consider them "better".
What if this isn't for tax loss harvesting but a redemption to buy a new car or whatever? Also, odds are if my oldest lots are underwater, the newer ones will be as well.

And what if there are no losses? Use my VTI example.
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Peter Foley
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Re: Which lots do you sell when redeeming shares?

Post by Peter Foley »

If I were in the 15% tax bracket I would sell the lowest cost shares that did not bump me into the 15% bracket. If in the 25% bracket I would sell the highest cost shares if profits from the sale were classified as long term capital gains.

Not the issue at hand, but if you donate shares to a donor advised fund, the oldest shares are donated.
placeholder
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Re: Which lots do you sell when redeeming shares?

Post by placeholder »

nobsinvestor wrote:What if this isn't for tax loss harvesting but a redemption to buy a new car or whatever? Also, odds are if my oldest lots are underwater, the newer ones will be as well.
You should usually go for the losses first unless you're in a situation where you could realize long term gains with paying any tax on them because then the loss would be wasted.
technovelist
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Re: Which lots do you sell when redeeming shares?

Post by technovelist »

What is your total income for the year? If you are in the 15% bracket, and they qualify for long-term rates, then the optimum approach is to sell an amount that brings your total income to the top of that bracket, since LTCG in the 15% (and 10%) brackets have a 0% tax rate.
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livesoft
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Re: Which lots do you sell when redeeming shares?

Post by livesoft »

nobsinvestor wrote:And what if there are no losses? Use my VTI example.
In all cases, sell the shares that will cost you the least in taxes.
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Meg77
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Re: Which lots do you sell when redeeming shares?

Post by Meg77 »

Yes, in your case you should sell the $100/share lot. It cost you the least in taxes, plus it also has the added benefit of being precisely the amount you want to redeem.
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Hank Moody
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Re: Which lots do you sell when redeeming shares?

Post by Hank Moody »

Always sell the highest cost lots first, regardless of your income. You can always harvest gains later in the year if your personal tax planning suggests that there's an opportunity to do so.
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Artsdoctor
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Re: Which lots do you sell when redeeming shares?

Post by Artsdoctor »

At first I thought this was a trick question. Of course you'd sell the shares with the highest cost basis in order to pay the least tax.

But that's not necessarily true. For example, let's say your income this year is extremely low (laid off, between jobs, etc.) and you've found yourself in the 0% long-term capital gains bracket. You might want to "unload" those shares with the lowest cost basis because it cost you nothing now.

Even if you have carryover losses from previous years, you'd still want to unload those shares with the highest cost basis in order to use up as little of the carryover losses that you can. If carry over losses indefinitely.
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grabiner
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Re: Which lots do you sell when redeeming shares?

Post by grabiner »

One other time not to sell the highest-basis lot is when you would have to pay short-term gains.

In 2006, I needed to sell some Total Stock Market. I could have sold shares which I had bought in 2005 for $4500, or shares which I had bought earlier in 2006 for $5000. If the shares had been worth $6000, I would have sold the 2005 shares; the tax on a $1500 long-term gain is less than the tax on a $1000 short-term gain. As it happened, the shares I sold were worth $5032, so I took the $32 short-term gain instead of the $532 long-term gain.
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