Sell to lock in 0% cap gains?

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desafinado
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Sell to lock in 0% cap gains?

Post by desafinado » Mon Dec 11, 2017 11:43 am

I'm graduating from college at the end of the year and consequently will be entering some higher tax brackets (my income this year was < $30k). A few years ago, a family member gifted me a few thousand dollars in shares and they have grown by another few thousand dollars. I'd like to move the money out of an individual company and into an index fund anyways. Can (and should) I sell before the end of the year in order to pay 0% capital gains tax and move the money into an index fund?

ensign_lee
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Re: Sell to lock in 0% cap gains?

Post by ensign_lee » Mon Dec 11, 2017 11:45 am

Seems like a great idea to me tbh.

Even if for some reason you wanted to stay in those stocks, there's no such thing as a wash sale GAIN.

Your only downside will be trading fees, but really, what's $10 or so in the grand scheme of your taxes?

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tyrion
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Re: Sell to lock in 0% cap gains?

Post by tyrion » Mon Dec 11, 2017 12:12 pm

I've done this before. Remember to account for state taxes, if applicable.

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Watty
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Re: Sell to lock in 0% cap gains?

Post by Watty » Mon Dec 11, 2017 12:18 pm

It makes sense and is called tax gain harvesting.

https://www.bogleheads.org/wiki/Tax_gain_harvesting

In addition to federal and state taxes you also need to consider if it will impact things like college financial aid and healthcare subsidies.

The reason is that even though you will owe zero federal taxes on it the capital gains may still count as income on the calculations for eligibility for things like these.

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celia
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Re: Sell to lock in 0% cap gains?

Post by celia » Mon Dec 11, 2017 12:23 pm

Since we're close to the end of the year, it's pretty easy to tell what your income will be THIS year. You may or may not have another chance to do this in FUTURE years. So I would do it now. Even if you have this chance again in 10 years (unemployed, long term illness, sabbatical), maybe you'll have another asset then that you want to sell for no taxes on the gain. So it seems a good idea to take care of this now.

The only hesitation I can think of is if you are still claimed on your parent's return.

red5
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Re: Sell to lock in 0% cap gains?

Post by red5 » Tue Dec 12, 2017 4:36 am

I've been thinking about this and would just like to piggy back on this thread. Would it go something like this:

1. Sell ALL shares of an asset, such as Vanguard Total Stock (VTI).
2. Within seconds use transaction proceeds to purchase back as many shares as possible.

So by Close of Business you'll have approximately the same number of shares as you began the day with. Is it that easy?

Further, let's say you had a $1,000 capital gain. When doing taxes this $1,000 will show up as income on line 13 of Form 1040. Thus it'll get transferred eventually to you AGI and thus will be taxed. To prevent this could you invest an additional $1,000 in a traditional IRA in order to cancel out that extra $1,000 in income (assuming one has the space and qualifies)?

solar99999
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Re: Sell to lock in 0% cap gains?

Post by solar99999 » Tue Dec 12, 2017 4:56 am

Before you sell anything, do a quick read here (https://www.irs.gov/taxtopics/tc553) to see if you are subject to the kiddie tax rules.

If you are, a portion of your capital gains might be taxed at your parent's rate as opposed to your own.

Note that the kiddie tax rules apply if you can be claimed as a dependent on your parent's tax returns even if they choose not claim you.
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rkhusky
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Re: Sell to lock in 0% cap gains?

Post by rkhusky » Tue Dec 12, 2017 8:17 am

red5 wrote:
Tue Dec 12, 2017 4:36 am
I've been thinking about this and would just like to piggy back on this thread. Would it go something like this:

1. Sell ALL shares of an asset, such as Vanguard Total Stock (VTI).
2. Within seconds use transaction proceeds to purchase back as many shares as possible.

So by Close of Business you'll have approximately the same number of shares as you began the day with. Is it that easy?

Further, let's say you had a $1,000 capital gain. When doing taxes this $1,000 will show up as income on line 13 of Form 1040. Thus it'll get transferred eventually to you AGI and thus will be taxed. To prevent this could you invest an additional $1,000 in a traditional IRA in order to cancel out that extra $1,000 in income (assuming one has the space and qualifies)?
I'm not sure how fast you can sell and then buy. I am planning to do this in the near future, but currently I plan to sell one day and then buy back the next day. But I have mutual funds, not ETF's.

If you have capital gains, you use the Qualified Dividends and Capital Gain Tax Worksheet to calculate your tax, in order to pay capital gains tax rather than income tax. Capital gains tax is less than income tax. So, putting $1000 in a Traditional IRA would over-compensate for the $1000 in cap gains, which is not a bad thing. If you have the funds, you should be maxing out all tax-advantaged options anyway.

On the other hand, the AGI does affect certain tax credits, such as Child Tax Credit. Therefore, the $1000 in Traditional IRA would restore any tax credits that may be lost due to the cap gains (unless the AGI is modified (MAGI) to remove the Traditional IRA contribution).

red5
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Re: Sell to lock in 0% cap gains?

Post by red5 » Wed Dec 13, 2017 2:55 am

rkhusky wrote:
Tue Dec 12, 2017 8:17 am
red5 wrote:
Tue Dec 12, 2017 4:36 am
I've been thinking about this and would just like to piggy back on this thread. Would it go something like this:

1. Sell ALL shares of an asset, such as Vanguard Total Stock (VTI).
2. Within seconds use transaction proceeds to purchase back as many shares as possible.

So by Close of Business you'll have approximately the same number of shares as you began the day with. Is it that easy?

Further, let's say you had a $1,000 capital gain. When doing taxes this $1,000 will show up as income on line 13 of Form 1040. Thus it'll get transferred eventually to you AGI and thus will be taxed. To prevent this could you invest an additional $1,000 in a traditional IRA in order to cancel out that extra $1,000 in income (assuming one has the space and qualifies)?
I'm not sure how fast you can sell and then buy. I am planning to do this in the near future, but currently I plan to sell one day and then buy back the next day. But I have mutual funds, not ETF's.

If you have capital gains, you use the Qualified Dividends and Capital Gain Tax Worksheet to calculate your tax, in order to pay capital gains tax rather than income tax. Capital gains tax is less than income tax. So, putting $1000 in a Traditional IRA would over-compensate for the $1000 in cap gains, which is not a bad thing. If you have the funds, you should be maxing out all tax-advantaged options anyway.

On the other hand, the AGI does affect certain tax credits, such as Child Tax Credit. Therefore, the $1000 in Traditional IRA would restore any tax credits that may be lost due to the cap gains (unless the AGI is modified (MAGI) to remove the Traditional IRA contribution).

Thank you for your reply. I appreciate it. I did end up going through with the capital gains harvesting with 2 ETFs and was able to repurchase them immediately.

My concern was indeed about tax credits. The capital gains ended up moving me into a lower "Retirement Savings Contribution Credit" bucket and affected the "Earned Income Credit" but the traditional IRA contribution will cancel that out.

Thanks again

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oldcomputerguy
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Re: Sell to lock in 0% cap gains?

Post by oldcomputerguy » Wed Dec 13, 2017 6:24 am

rkhusky wrote:
Tue Dec 12, 2017 8:17 am
I'm not sure how fast you can sell and then buy. I am planning to do this in the near future, but currently I plan to sell one day and then buy back the next day. But I have mutual funds, not ETF's.
I recently sold some shares of VTSAX held at Vanguard, and received a warning that I would be restricted from buying any VTSAX shares for thirty days. Vangaurd doesn't like frequent trading in their mutual funds. So I'm not sure you'd be able to do what you're describing. There's a way around it using automatic investing, but it's always seemed more trouble to me than it was worth.
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rkhusky
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Re: Sell to lock in 0% cap gains?

Post by rkhusky » Wed Dec 13, 2017 7:43 am

oldcomputerguy wrote:
Wed Dec 13, 2017 6:24 am
rkhusky wrote:
Tue Dec 12, 2017 8:17 am
I'm not sure how fast you can sell and then buy. I am planning to do this in the near future, but currently I plan to sell one day and then buy back the next day. But I have mutual funds, not ETF's.
I recently sold some shares of VTSAX held at Vanguard, and received a warning that I would be restricted from buying any VTSAX shares for thirty days. Vangaurd doesn't like frequent trading in their mutual funds. So I'm not sure you'd be able to do what you're describing. There's a way around it using automatic investing, but it's always seemed more trouble to me than it was worth.
You're right. I forgot about Vanguard's restrictions. I'll either have to buy and then sell, which requires having the available cash, or sell and buy something similar (i.e. sell Total Stock and buy Index 500 and Extended Market).

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