How & when to sell lots of a single stock with huge capital gains

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manzana
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How & when to sell lots of a single stock with huge capital gains

Post by manzana » Mon Feb 13, 2017 12:19 am

My parents had the opportunity to purchase some Facebook stock very early in the company's history, long before they went public. That stock is now worth a high six-figure amount, and because the cost basis was pennies per share, nearly that entire amount represents capital gains.

They recognize it's risky holding so much of a single stock and that since they've "won," the rational thing would be to sell. But they are in the highest capital gains tax bracket, and live in California where cap gains are treated as ordinary income, which means that if they sold the stock, they'd pay around 30% total in tax on nearly the entire proceeds from the sale.

They plan to retire in the next few years and don't actually need this money - they're in good shape either way. They've been thinking they should just hold the stock for the rest of their lives and let their children inherit it with a stepped-up basis, but that could be 20-30 years from now (thankfully) which is a long time to bank on FB continuing to do well.

So, Bogleheads, what would you do in their situation? Sell and accept the high taxes as a reasonable price for their very good luck? Wait a few years until retirement when they'll probably be in a lower bracket? Or is there something more creative they could do - for example, gift the shares to myself and my brother, we sell as much as we can at a lower tax rate...and then could we pay my parents back the cash generated? That seems like it would be shady - is it doable if we wait a certain period of time after the gift was received?

It's a good problem to have, I know. Any advice appreciated..

manzana
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Re: How & when to sell lots of a single stock with huge capital gains

Post by manzana » Mon Feb 13, 2017 5:33 pm

One idea - if they have investments with losses (not sure if they do), could they TLH to realize those losses, then sell an equivalent amount of FB so that the gains & losses cancel out.

retiredjg
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Re: How & when to sell lots of a single stock with huge capital gains

Post by retiredjg » Mon Feb 13, 2017 5:52 pm

If the stock makes then nervous, they should just sell it all. It would be silly to let this wonderful unexpected "gift" cause them to be uncomfortable.

But it does not sound like they are actually nervous or uncomfortable about it. If that is correct, I don't think waiting a bit would be harmful. Maybe sell a little (10%?) this year and just pay the tax and call it good. Then if FB goes to $0 next year, they'd at least have that much profit from their investment.

This is really bird in the hand vs two in the bush...except it is more like 1 in the hand and 1.2 in the bush, isn't it? That 1.2 is a made up number, but you get the point, I'm sure. :happy

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alec
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Re: How & when to sell lots of a single stock with huge capital gains

Post by alec » Mon Feb 13, 2017 5:52 pm

How about instead of donating cash to charities, donate the appreciated FB shares.
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Re: How & when to sell lots of a single stock with huge capital gains

Post by retiredjg » Mon Feb 13, 2017 5:53 pm

Oh yes, instead of giving to charity, if they do, they can give some of the shares of FB instead. They get the tax-deduction and the charity doesn't have to pay tax on the gain.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by bloom2708 » Mon Feb 13, 2017 5:56 pm

Taxes are a fact of life. Even if they paid 30% in taxes, they are still up thousands of % from "pennies per share".

Hold it, give it away, pair some with losses, sell some and pay the tax, sell all and pay the tax.

It is a good problem and paying some tax should not prevent them from making a change.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Sandtrap » Mon Feb 13, 2017 5:57 pm

Stock exchange. Stock investors with highly appreciated securities can also do a like-kind exchange. Certain services offer investors with one highly appreciated security a way to trade it for an equivalently valued but more diversified portfolio. This service can help investors avoid paying even larger capital gains taxes.
This from "google" perhaps applies and may be a partial solution or not.

SGM
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Re: How & when to sell lots of a single stock with huge capital gains

Post by SGM » Mon Feb 13, 2017 6:00 pm

I would do a combination of several things to decrease taxes. Donate stock instead of cash. Sell a little each year. Tax loss harvest where possible. Hold some for inheritance. If they are planning on moving to a lower cost state or expect their income to decrease later they could sell more at that time. If the children are in a lower tax bracket gift some of the stock to them It is a good problem to have.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by cherijoh » Mon Feb 13, 2017 6:15 pm

manzana wrote:My parents had the opportunity to purchase some Facebook stock very early in the company's history, long before they went public. That stock is now worth a high six-figure amount, and because the cost basis was pennies per share, nearly that entire amount represents capital gains.

They recognize it's risky holding so much of a single stock and that since they've "won," the rational thing would be to sell. But they are in the highest capital gains tax bracket, and live in California where cap gains are treated as ordinary income, which means that if they sold the stock, they'd pay around 30% total in tax on nearly the entire proceeds from the sale.

They plan to retire in the next few years and don't actually need this money - they're in good shape either way. They've been thinking they should just hold the stock for the rest of their lives and let their children inherit it with a stepped-up basis, but that could be 20-30 years from now (thankfully) which is a long time to bank on FB continuing to do well.

So, Bogleheads, what would you do in their situation? Sell and accept the high taxes as a reasonable price for their very good luck? Wait a few years until retirement when they'll probably be in a lower bracket? Or is there something more creative they could do - for example, gift the shares to myself and my brother, we sell as much as we can at a lower tax rate...and then could we pay my parents back the cash generated? That seems like it would be shady - is it doable if we wait a certain period of time after the gift was received?

It's a good problem to have, I know. Any advice appreciated..
They could set up a donor advised fund with appreciated stock and then make donations to charity at a later date to smooth out their donations. See this article in the Wiki.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Liberty1100 » Mon Feb 13, 2017 6:33 pm

cherijoh wrote:
manzana wrote:My parents had the opportunity to purchase some Facebook stock very early in the company's history, long before they went public. That stock is now worth a high six-figure amount, and because the cost basis was pennies per share, nearly that entire amount represents capital gains.

They recognize it's risky holding so much of a single stock and that since they've "won," the rational thing would be to sell. But they are in the highest capital gains tax bracket, and live in California where cap gains are treated as ordinary income, which means that if they sold the stock, they'd pay around 30% total in tax on nearly the entire proceeds from the sale.

They plan to retire in the next few years and don't actually need this money - they're in good shape either way. They've been thinking they should just hold the stock for the rest of their lives and let their children inherit it with a stepped-up basis, but that could be 20-30 years from now (thankfully) which is a long time to bank on FB continuing to do well.

So, Bogleheads, what would you do in their situation? Sell and accept the high taxes as a reasonable price for their very good luck? Wait a few years until retirement when they'll probably be in a lower bracket? Or is there something more creative they could do - for example, gift the shares to myself and my brother, we sell as much as we can at a lower tax rate...and then could we pay my parents back the cash generated? That seems like it would be shady - is it doable if we wait a certain period of time after the gift was received?

It's a good problem to have, I know. Any advice appreciated..
They could set up a donor advised fund with appreciated stock and then make donations to charity at a later date to smooth out their donations. See this article in the Wiki.
I second this advice. You receive "credit" for the correct value, and the amount that you paid doesn't matter. Since they are high income, this can be used to pay less taxes on their income and then can effectively do what they want. Also with this, they would not need to decide which charity it would go to. They wouldn't need to make that decision for years, if they couldn't decide, all while that stock could be compounding more.

toto238
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Re: How & when to sell lots of a single stock with huge capital gains

Post by toto238 » Mon Feb 13, 2017 6:41 pm

If they already give to charity, perhaps consider giving appreciated shares. Giving gifts to children/grandchildren? Give the gift of appreciated shares and have the kids/grandkids deal with the capital gains. I know I'm not complaining if my grandparent gives me a gift of 100 shares of Facebook even if I have to pay capital gains on it.

Perhaps your parents could arrange a way to get themselves into the 15% tax bracket one year. I believe under current law that tax bracket pays 0% in capital gains. So for example one year they could live off of just Roth IRA assets and then incur $75k of capital gains. That keeps them in the 15% tax bracket, in theory. Consult a tax professional before trying this, I am not a tax professional.

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patriciamgr2
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Re: How & when to sell lots of a single stock with huge capital gains

Post by patriciamgr2 » Mon Feb 13, 2017 9:24 pm

This is one instance where even diehard DIYers might want to consult a CPA with experience working with Silicon Valley stockholders.

It's been many years since I've looked at this & tax laws change frequently, but back then if a person had at least 7 figures in value of highly-appreciated stock, you could pay an investment firm to exchange the return on your stock for a broad-based index return. There were also specially-structured partnerships where you contributed your stock in a non-taxable event in return for receiving a broader equity return. In addition, a hedging strategy (using collars) can be devised to reduce risk for a few years if your parents will be in a lower bracket in retirement (although hedging IMO is quite costly).

If your parents want this value to be transferred to family members, and won't otherwise use up their entire estate tax allowance (under current law), perhaps they could explore whether periodic gifts of the higher-appreciated lots to family members (who could then sell at a stepped-up basis) would reduce the overall tax burden. As other posters have noted, charitable gifts should be made with appreciated stock.

Because none of us has a crystal ball, we are asked to avoid discussing proposed legislation on this Forum. So I will just note that in your original post you assume that current estate rules about inherited stock receiving a stepped-up basis will continue. Some proposals (who knows if they might pass?) relating to reduction/elimination of the estate tax provide for a carryover basis instead--of course, I have no idea whatsoever what tax law will be in the (hopefully, far off) future at the time of your parents' passing.

My personal opinion: I hope your parents don't let tax minimization goals totally outweigh sensible diversification goals. Good Luck in any event.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by poker27 » Mon Feb 13, 2017 9:29 pm

Are you sure it was pennies? Looks like it debuted at $3x and was $18 ish at its lowest.

I remember a guy sitting next to me at work bought a ton for his kid very early on. Must be doing well ;)

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Gill » Mon Feb 13, 2017 9:30 pm

Sandtrap wrote:
Stock exchange. Stock investors with highly appreciated securities can also do a like-kind exchange. Certain services offer investors with one highly appreciated security a way to trade it for an equivalently valued but more diversified portfolio. This service can help investors avoid paying even larger capital gains taxes.
This from "google" perhaps applies and may be a partial solution or not.
I believe this loophole was eliminated many years ago and the exchange would now be taxable.
Gill

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Re: How & when to sell lots of a single stock with huge capital gains

Post by dumbbunny » Mon Feb 13, 2017 9:41 pm

bloom2708 wrote:Taxes are a fact of life. Even if they paid 30% in taxes, they are still up thousands of % from "pennies per share".
True dat! I sold some VTSMX that I had since the mid-90s. It had a nice ride and I don't mind paying taxes on the capital gains.
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"

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Re: How & when to sell lots of a single stock with huge capital gains

Post by selters » Tue Feb 14, 2017 4:33 am

poker27 wrote:Are you sure it was pennies? Looks like it debuted at $3x and was $18 ish at its lowest.

I remember a guy sitting next to me at work bought a ton for his kid very early on. Must be doing well ;)
You are right that Facebook's IPO price was $38, but we're talking about pre-IPO shares.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Sandtrap » Tue Feb 14, 2017 8:44 am

Gill wrote:
Sandtrap wrote:
Stock exchange. Stock investors with highly appreciated securities can also do a like-kind exchange. Certain services offer investors with one highly appreciated security a way to trade it for an equivalently valued but more diversified portfolio. This service can help investors avoid paying even larger capital gains taxes.
This from "google" perhaps applies and may be a partial solution or not.
I believe this loophole was eliminated many years ago and the exchange would now be taxable.
Gill
Thanks, "Gill".
Shucks :(

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Afty » Tue Feb 14, 2017 9:44 am

I agree with the suggestions to donate appreciated shares. You mentioned that they will retire in a few years. They could also just hang onto the FB stock until they retire, then start selling it. Presumably they will be in a lower tax bracket then.

I would also be worried with such a large amount concentrated in one stock.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Valuethinker » Tue Feb 14, 2017 10:48 am

manzana wrote:My parents had the opportunity to purchase some Facebook stock very early in the company's history, long before they went public. That stock is now worth a high six-figure amount, and because the cost basis was pennies per share, nearly that entire amount represents capital gains.

They recognize it's risky holding so much of a single stock and that since they've "won," the rational thing would be to sell. But they are in the highest capital gains tax bracket, and live in California where cap gains are treated as ordinary income, which means that if they sold the stock, they'd pay around 30% total in tax on nearly the entire proceeds from the sale.

They plan to retire in the next few years and don't actually need this money - they're in good shape either way. They've been thinking they should just hold the stock for the rest of their lives and let their children inherit it with a stepped-up basis, but that could be 20-30 years from now (thankfully) which is a long time to bank on FB continuing to do well.

So, Bogleheads, what would you do in their situation? Sell and accept the high taxes as a reasonable price for their very good luck? Wait a few years until retirement when they'll probably be in a lower bracket? Or is there something more creative they could do - for example, gift the shares to myself and my brother, we sell as much as we can at a lower tax rate...and then could we pay my parents back the cash generated? That seems like it would be shady - is it doable if we wait a certain period of time after the gift was received?

It's a good problem to have, I know. Any advice appreciated..
many of us were in the position of being quite wealthy (on paper) at the peak of the tech bubble. And this included holding stocks like Amazon, Yahoo, Ebay, Microsoft, HP, Cisco -- not just dot com wunderkinden.

And we lost 50% or more of that money-- over 90% in my case (including stock in my employer).

It's not money until you have it in cash. It's barely money if you hold it in a highly diversified equity portfolio (that can still drop 50%, easily).

So my advice would be to sell and pay the tax. If there is a desire to ride the thing, keep maybe 1/4 to 1/3rd of the original holding.

70% of a gain after tax is still a lot better than no gain at all.

But sell. Then reinvest in broad index funds.

The terrible irony is the one stock I have like this, where I have made 10x my money is an *oil sands* play. About the most old economy, dirtiest, least Facebook like investment you could possibly have made. Oh and Canadian bank stocks. But I have taken considerable gains off the table- -around 3/4 s.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by BigJohn » Tue Feb 14, 2017 6:45 pm

A long as their retirement is secure without this stock then they can afford to optimize the solution over time rather than worry about shorter term risk mitigation. As other have suggested, doing all of their charitable giving with this stock, either through a DAF or direct share transfer, is the only way to avoid paying taxes at some point. I'd start this immediately. If the $$ amount here is high enough that this won't use up all the stock over time then the question becomes what tax bracket do the expect to be in during retirement. This would include any plans to relocate to a low tax location. If they expect taxes to be lower in a few year, then waiting to sell might make some sense. If they are going to be in the same tax bracket after retirement, I'd start now selling some each year.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by bigred77 » Tue Feb 14, 2017 6:53 pm

Valuethinker wrote:
So my advice would be to sell and pay the tax. If there is a desire to ride the thing, keep maybe 1/4 to 1/3rd of the original holding.

70% of a gain after tax is still a lot better than no gain at all.

But sell. Then reinvest in broad index funds.
+1

Don't let the tail wag the dog.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by chabil » Tue Feb 14, 2017 7:04 pm

whatever they do, best to sell BEFORE they retire. it get a lot more tricky then because of Medicare, RMW, etc

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Re: How & when to sell lots of a single stock with huge capital gains

Post by burt » Tue Feb 14, 2017 7:13 pm

bloom2708 wrote:Taxes are a fact of life. Even if they paid 30% in taxes, they are still up thousands of % from "pennies per share".

Hold it, give it away, pair some with losses, sell some and pay the tax, sell all and pay the tax.

It is a good problem and paying some tax should not prevent them from making a change.
Just pay the tax.
I'm looking at young couples dragging their behinds to work at 5:30 am and paying tax.
I'm retired, living a comfortable life from pension and savings. Also paying tax.

Just pay the tax.

burt

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Re: How & when to sell lots of a single stock with huge capital gains

Post by fantasytensai » Tue Feb 14, 2017 8:18 pm

Is moving to a more tax-friendly state to establish residency an option?

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Re: How & when to sell lots of a single stock with huge capital gains

Post by PoppyA » Tue Feb 14, 2017 8:28 pm

I'd wait a bit and see if we get a new tax structure given Trumps talk of restructuring.
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Re: How & when to sell lots of a single stock with huge capital gains

Post by nerdymarketer » Wed Feb 15, 2017 1:49 am

1) I would seriously consider moving to Reno for a year to avoid CA residency tax. If it's 30% of high six figures, working remote or taking a one-year leave of absence might still come out ahead financially. And they get a year of traveling if they want as long as they stay out of CA and in Nevada long enough to establish residency.

2) FB is one of very, very few stocks I personally would be very comfortable holding onto for another few years. I've met Zuck and worked across the table from various stakeholders at FB and Zuck's track record is very very good. That said, 20-30 years feels too long... inevitably in tech, as a company grows it loses it's nimbleness much faster than in other industries, plus I don't see Zuck staying at the helm for 20-30 years. He admires Bill Gates, and has similarly expressed interest in moving onto other projects at some point such as non-profits/family.

So I'd personally be planning a 5-10 year time horizon to divest a bit each year through giving to kids + charities, and see if I could squeeze in a year of traveling/Nevada state residency in there to sell the rest.

lext
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Re: How & when to sell lots of a single stock with huge capital gains

Post by lext » Wed Feb 15, 2017 2:47 am

manzana wrote:One idea - if they have investments with losses (not sure if they do), could they TLH to realize those losses, then sell an equivalent amount of FB so that the gains & losses cancel out.
They'll have to lose a lot of money to make TLH worth the amount of gain, I think. Definitely not a problem one wish to have.

Btw, earlier you said: "live in California where cap gains are treated as ordinary income, which means that if they sold the stock, they'd pay around 30% total in tax on nearly the entire proceeds from the sale." Just so I understand, you're saying they'll have to pay 20% long term capital gain, plus around 10% California income tax, right?
(I live in California too, hence I want to understand in case I'm ever in the same boat).

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Re: How & when to sell lots of a single stock with huge capital gains

Post by TBillT » Wed Feb 15, 2017 1:54 pm

The long term gains can be sold at quite low tax rate depending on other income and total amount sold etc. Above about $250k total income for Married/Joint the excess Medicare tax kicks in (~+4%). One strategy in retirement is to minimize other income (minimize IRA etc) and take those cap gains up to approx. $250k level before the excess Medicare kicks in. So timing the sales based on tax year and shooting for target price on the stock. As someone said above, if they really want to get out now, then do so...but something also to be said for a multi year plan. Besides donations, family gifting is also idea. Or investing proceeds in 529 college saving funds (cannot usually transfer the stocks).

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Easy Rhino » Wed Feb 15, 2017 2:54 pm

And if charity doesn't work, try gifting shares to friends and relatives with lower tax brackets.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by itstoomuch » Wed Feb 15, 2017 3:09 pm

IMO
LTCG treatment is a fairly recent development. I remember LTCG being taxed at a much higher rates, and it never stopped me from trading or taking profits.

Being concentrated in a nice company with highly appreciated stock is envious.
DIversifing into other stuff, in this instance, may be more detrimental :?:

Your parents a must have had a then nice brokerage account or knew somebody to acquire FB so cheaply.
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Re: How & when to sell lots of a single stock with huge capital gains

Post by Epsilon Delta » Wed Feb 15, 2017 3:24 pm

nerdymarketer wrote:1) I would seriously consider moving to Reno for a year to avoid CA residency tax.
Moving to Reno for a year does not avoid CA residency.

Moving to Reno for the rest of your life and after a year deciding you don't like Reno and moving back to CA does avoid CA residency.

For large amounts of money you may have to argue the difference.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by JoinToday » Wed Feb 15, 2017 3:25 pm

bigred77 wrote:
Valuethinker wrote:
So my advice would be to sell and pay the tax. If there is a desire to ride the thing, keep maybe 1/4 to 1/3rd of the original holding.

70% of a gain after tax is still a lot better than no gain at all.

But sell. Then reinvest in broad index funds.
+1

Don't let the tail wag the dog.
+1

Look at this a little differently: If your parents sell the stock at some point, they will be paying some tax, it is almost unavoidable: they will be looking at something like 15% LTCG + 9.3% calif (assuming they pay AMT, and Calif taxes are not deductible) It isn't like the choice is 30% vs 0% (unless the stock is held to death and we still get a stepped up basis). So in reality, the delta cost is 5-6% for the options chosen.

If it were me, I would donate what I felt like, give appreciated shares to whoever they wanted to, and just sell the rest. Get it behind you. This is what I did when I was in those shoes (although the dollar amount was much much less in my case). And I felt so good when it was done.

A 6% delta in tax is nothing compared to a 30% drop in stock value.
I wish I had learned about index funds 25 years ago

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Toons » Wed Feb 15, 2017 3:27 pm

Paying capital gains is part of the investing equation when you realize a a profit.
The alternative is to not make a profit and not pay taxes.
Think it through :mrgreen:
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Re: How & when to sell lots of a single stock with huge capital gains

Post by randomguy » Wed Feb 15, 2017 3:51 pm

nerdymarketer wrote:1) I would seriously consider moving to Reno for a year to avoid CA residency tax. If it's 30% of high six figures, working remote or taking a one-year leave of absence might still come out ahead financially. And they get a year of traveling if they want as long as they stay out of CA and in Nevada long enough to establish residency.

2) FB is one of very, very few stocks I personally would be very comfortable holding onto for another few years. I've met Zuck and worked across the table from various stakeholders at FB and Zuck's track record is very very good. That said, 20-30 years feels too long... inevitably in tech, as a company grows it loses it's nimbleness much faster than in other industries, plus I don't see Zuck staying at the helm for 20-30 years. He admires Bill Gates, and has similarly expressed interest in moving onto other projects at some point such as non-profits/family.

So I'd personally be planning a 5-10 year time horizon to divest a bit each year through giving to kids + charities, and see if I could squeeze in a year of traveling/Nevada state residency in there to sell the rest.
1) it is 10-13%. Less if they get to deduct CA taxes. They are paying the ~24% LTGC no matter where they live. A 100k in taxes sounds like a lot. The cost of moving to a different state and the like though is going to eat up a lot of that money. In retirement they would probably save more money by spreading out the sale (stay in the federal 15% bracket versus the 24%) than moving for 1 year. Obviosly if they plan on retiring to a low tax state that is a lot different than upending your life for a year or two for a couple of bucks (for people making enough so that installment sales can't keep you in the 15-19% range)

2) few companies have good 20-30 year runs. You remember the ones that do and not the ones that fade away.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by retiredjg » Wed Feb 15, 2017 3:56 pm

Epsilon Delta wrote:For large amounts of money you may have to argue the difference.
As I recall, I believe we've heard that CA is one of the states that is very aggressive about pursuing this. I'd move away for more than 1 year.

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Re: How & when to sell lots of a single stock with huge capital gains

Post by Whakamole » Wed Feb 15, 2017 4:22 pm

retiredjg wrote:
Epsilon Delta wrote:For large amounts of money you may have to argue the difference.
As I recall, I believe we've heard that CA is one of the states that is very aggressive about pursuing this. I'd move away for more than 1 year.
I would probably enlist an attorney for help in doing this the correct way, with the amounts involved.

They can also move to sunny (?) Washington if they want to remain close to the coast.

MathMajor
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Re: How & when to sell lots of a single stock with huge capital gains

Post by MathMajor » Wed Feb 15, 2017 4:26 pm

retiredjg wrote:
Epsilon Delta wrote:For large amounts of money you may have to argue the difference.
As I recall, I believe we've heard that CA is one of the states that is very aggressive about pursuing this. I'd move away for more than 1 year.
Yep - a CA resident moving to Nevada should expect to stay 3 or 4 years before moving back to CA to have any kind of hope of winning the court case CA would bring.

It would be a huge bummer to upend your life, move to Nevada for a year for tax considerations, and move back to CA all for naught.

I'd highly recommend talking to a professional tax accountant who specializes in this sort of thing before undertaking a move of this kind - they'll know the latest news in this space.

bsteiner
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Re: How & when to sell lots of a single stock with huge capital gains

Post by bsteiner » Wed Feb 15, 2017 4:44 pm

There are several choices: hold the stock until death and take the investment risk, sell and pay the tax, use an exchange fund (which has expenses and other disadvantages), or a charitable remainder trust (which has some cost and inflexibility, and defers rather than eliminates the tax). It's not all or nothing -- you can do some of each, or some of two or more of them.

Another possibility is an incomplete gift trust (or what I called an accidentally perfect nongrantor trust). That's a trust that you create for your own benefit in a state such as Delaware, Nevada or South Dakota. The trust is not a completed gift for gift tax purposes, and it's still in your estate for estate tax purposes. However, it's a separate taxpayer for income tax purposes. It pays Federal but not state income tax. If you live in California, you'll pay California tax on any income and gains that are distributed to you (if you're still in California), but that might be later, or you might no longer be in California, or after your death it might be payable to recipients not in California.

This was more attractive before 2013 when the top Federal rate on long-term capital gains was 15% rather than 20%, and the 3.8% net investment income tax hadn't yet been enacted.

I discuss this in my article on this subject in the September 2005 issue of Trusts & Estates: http://kkwc.com/wp-content/uploads/2015 ... rantor.pdf.

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burt
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Re: How & when to sell lots of a single stock with huge capital gains

Post by burt » Wed Feb 15, 2017 6:00 pm

dumbbunny wrote:
bloom2708 wrote:Taxes are a fact of life. Even if they paid 30% in taxes, they are still up thousands of % from "pennies per share".
True dat! I sold some VTSMX that I had since the mid-90s. It had a nice ride and I don't mind paying taxes on the capital gains.
+1
I worked 40 years paying taxes on labor income.
I would be happy to pay taxes on capital gains. Money made while sitting on my a..

burt

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Watty
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Re: How & when to sell lots of a single stock with huge capital gains

Post by Watty » Wed Feb 15, 2017 8:35 pm

manzana wrote:They plan to retire in the next few years and don't actually need this money
But they will need some money to live on.

If they sold the stock, paid the taxes, then invested the money in a tax efficient mutual fund they could live off that and not have to take much money out of their other funds which could trigger taxes.

Basically they would only have to consider the taxes on a pension if they have one, then RMD's and Social Security when they start that.

If the stars align right they could go a decade or more doing Roth conversions up to the top of the 15% tax bracket each year. If they don't do Roth conversion it is conceivable that they could have some years where they pay no income taxes.

Be sure to look at their taxes over the next 20+ years to minimize that and not just the year they sell the stocks.

TBillT
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Re: How & when to sell lots of a single stock with huge capital gains

Post by TBillT » Wed Feb 15, 2017 11:10 pm

manzana wrote: They plan to retire in the next few years and don't actually need this money - they're in good shape either way. They've been thinking they should just .
In retirement, if there is no other income, the cap gains rate is 0% in lower incomes and then goes up to 15%.
So there is a potential for very low Federal tax rate treatment up to a certain point. That's what I am trying to do this year, I'll let you know how it works after I finish my taxes. I actually reversed some of my 2016 IRA withdrawals within the 60 day limit, when I decided to take cap gains instead. So I am trying to take the cap gains at the lower income tax brackets. Of course we'll want to watch closely for any LTCG tax law changes.

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