Possible Capital gain tax changes? sell non index stock now?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Possible Capital gain tax changes? sell non index stock now?

Post by LH »

I have been wondering whether to get rid of my individual stock for a while now. I have held it for years, and have largely been a sp500 indexor, but always held around 20 percent stock.

I have already been selling a lot of it this year, but with the thought of capital gains changing from 15 to who knows what in the possible near Rangel future, I am considering selling basically all of it before the end of this year.

The stock was initially bought long term, and the though of incurring capital gains is painful, and goes against the best time to sell is never. So its monetarily painful, as well as philosophically painful, also, I need to do some house improvements(my wife tells me) so maybe I will spend some of it on that too is a risk....

Anyway, I was wondering if anyone is in the same boat. Its basically a bunch of small positions in stocks like exxon ATT PG lucent comcast time warner etc.

I think if I do not sell it now, and index with it, I will miss the low capital gains rate, as well as be likely to underperform the index.....

anyway thoughts or comments appreciated, I have been equivicating on this for a while now.

thanks,

LH

PS: Another subset of this issue is: My exxon stock, which I bought one share of as a kid in 1984, has been in DRIP all this time. Could I just give it to my kids for UGTMA for college, sell it in thier names, and avoid 1)cost basis headahce and 2)paying any capital gains at all on it? The dividends should be a lot of that gain I would think (headache even thinking about trying to calculate it heh), and tax was already paid on that.

I know there is some sort of minimal kiddie tax benefit still. The exxon stock is worth about 4K now, and I have two 5 and 7 now. So 2k of exxon stock, invested since 1984.... The tax benefit has never seemed worth pursuing, but the combination of avoiding figuring out cost basis, and not having to pay tax would make this worth it I think?
sport
Posts: 9630
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Post by sport »

LH,
One good way to get rid of unwanted stock is to give it away as a charitable donation. If you do this, you get to itemize the current value of the stock and the capital gains are never taxed. Even if you do not itemize, the avoidance of the CG tax makes it preferrable to donating cash.

Best wishes,
Jeff
Plainsman
Posts: 334
Joined: Wed Aug 22, 2007 7:41 am

Post by Plainsman »

My uneducated opinion is that current tax law is unlikely to change through 2008. Rangel's proposal is just the beginning of the tax-reform debate. With the presidential election a year away, I don't think it is a debate that many Democrats and some Republicans are excited about engaging in.

Bush would veto anything resembling what Rangel is proposing. With 2008 being an election year, the Democrats are unlikely to attempt to override his veto.

If a Democrat were to win the white house next year and be sworn in in 2009, and if the Democrats hold on to both houses of congress, tax-reform will likely be enacted in 2009 rather than just waiting for the tax cuts of 2001 and 2003 to expire in 2010. Ordinary income and capital gains rates would all likely go higher in 2009.
Easy Rhino
Posts: 3268
Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Post by Easy Rhino »

If the stock pays a dividend, then a buy and hold individual stock is more efficient than a passive mutual fund, but I'm not sure if it's radically more efficient.

And in the uber-high tax regime that you fear, either your stock investments, or your mutual fund, would be taxed at the uber rates on dividends and capital gains.

So I guess the first question is, how much do you think your individual stock collection will underperform an index fund? And then, how will that underperformance change in a high-tax regime?
bolt
Posts: 870
Joined: Wed May 30, 2007 7:19 pm
Location: Boston

Post by bolt »

[removed at request of poster]
Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Post by Wagnerjb »

I think if I do not sell it now, and index with it, I will miss the low capital gains rate, as well as be likely to underperform the index.....
I don't know why the stocks would be "likely to underperform". Seems like they are just as likely to outperform as underperform. But the issue is that you probably aren't as diversified as you should be, and that would be a better reason to sell the stocks IMO.
I know there is some sort of minimal kiddie tax benefit still. The exxon stock is worth about 4K now, and I have two 5 and 7 now. So 2k of exxon stock, invested since 1984.... The tax benefit has never seemed worth pursuing, but the combination of avoiding figuring out cost basis, and not having to pay tax would make this worth it I think?
Sure. You can figure out how much you will save, and determine whether the paperwork is worth it. I can see you saving the entire capital gain if you have your children generate $800 a year in capital gains - which will be tax free. Don't forget though - if your children pay a $35 commission on each sale every year you might just eat up most of your savings.

I also like the idea of using the stock for charitable donations. If you are going to donate anyway, just use the shares for the donation and take the cash (that you would have donated) and use it the same way you would have used the Exxon proceeds.

Best wishes.
Andy
ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Post by ResNullius »

I don't think anyone can truly predict what will happen with our tax laws. Even if the Dems increase taxes on cap gains and dividends, the Repubs could always reduce them when they next come to power. These things come and go with the wind. My portfolio is for the long haul. On the other hand, since I'm in the process of moving a little of my equity exposure into fixed assets (something I've been planning to do for years, given my age), I'm going to have to sell some equity funds in my taxable account in order to achieve the balance I'm looking for. I've already moved what I'm willing to move in my tax-deferred account, so I need to move some more in my taxable account. I'm not under the gun, so I'm in no rush, other than I want to get it done within the next year or so. Given my schedule, it only makes sense for me to do the transaction while cap gains rates are lower, so I likely will do it some time next year. But for changing my allocation, I wouldn't do anything in anticipation of changes in the tax laws, since it's a loser's game to try to figure out what dumbo politicians might do down the road.
User avatar
Stickman
Posts: 155
Joined: Sat Sep 08, 2007 3:32 pm
Contact:

Paying for college

Post by Stickman »

Here's an idea to consider. Hang on to your stock until your kid(s) are actually enrolled in college and then gift to them your most highly appreciated stock. You can gift $24,000 per year. This shifts the tax burden from you (at 15%) to them (which might be something like 5% unless they are earning good money as students).

If CG tax rate increases for your bracket, the savings will be even better.

- Rick
User avatar
tdhg566
Posts: 860
Joined: Thu Mar 08, 2007 4:37 pm
Location: Spring, TX

Post by tdhg566 »

In May the Kiddie Tax was extended to age 23 starting in 2008, so college students don't provide the same sheltered haven for income that they once did. If you want to gift an appreciated asset to someone in college, you should consider doing it this year. Google "kiddie tax 2008" to find a bunch of articles about this.
As an Enrolled Agent I advise clients about taxes and investments. My work is retiree friendly, geographically portable, mentally stimulating, personally profitable and emotionally rewarding.
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

Thanks for the replies : )

Everytime I read about the kiddie tax to be honest my head spins, even here, two people seem to disagree. Its a confusing and changing topic, and one that seems to have little gain to reward one for digging through it.

Wagnerjb wrote:
I don't know why the stocks would be "likely to underperform". Seems like they are just as likely to outperform as underperform.
The reason I believe any given portfolio of individual stocks would be more likely to underperform an appropriately matched index is that they have unsystemic risks, which one should not be expected to be rewarded for bearing, while the index funds only have systemic risks, which one can reasonably expect to be rewarded for bearing. If I am bearing unrewarded risk in one basket, and only rewarded risk in another basket, all other things being equal(ER is perhaps unequal of course if thats what you are refering to?), the unrewarded risk basket should have a lower expected future value?

If its mostly just asset class picking, 90-100 percent or whatever, and an index captures that, without uncompensated risk, I would be hard pressed to expect a basket of stocks to beat a matched index in return on average going forward? Especially if one considers all possible baskets of stocks people pick, most of them are simply going to lose relative to the market right? The "free lunch" of indexing versus holding individual stocks is making the unsystemic risks dissapear largely, resulting in greater expected return.
User avatar
gatorman
Posts: 2493
Joined: Wed Oct 31, 2007 9:35 am
Location: The Swamp

Post by gatorman »

LH- If you give the kids the Exxon stock, you don't avoid the problem (and I feel your pain) of computing basis. The basis of the stock in the kid's hands is the same as yours (they get transferred basis) So you will still have to figure it out when it is sold. One way to avoid that conundrum is to hold on to it until you die and let them take it from your estate or trustee. They would then get a step up in basis to date of death value and would not have to figure out your basis.
Gatorman
Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Post by Wagnerjb »

LH said:
The reason I believe any given portfolio of individual stocks would be more likely to underperform an appropriately matched index is that they have unsystemic risks, which one should not be expected to be rewarded for bearing, while the index funds only have systemic risks, which one can reasonably expect to be rewarded for bearing. If I am bearing unrewarded risk in one basket, and only rewarded risk in another basket, all other things being equal(ER is perhaps unequal of course if thats what you are refering to?), the unrewarded risk basket should have a lower expected future value?

If its mostly just asset class picking, 90-100 percent or whatever, and an index captures that, without uncompensated risk, I would be hard pressed to expect a basket of stocks to beat a matched index in return on average going forward? Especially if one considers all possible baskets of stocks people pick, most of them are simply going to lose relative to the market right? The "free lunch" of indexing versus holding individual stocks is making the unsystemic risks dissapear largely, resulting in greater expected return.
With individual stocks, you have the exact same expected return as the index, but you have more volatility. The extra volatility is the "risk" that you eliminate with a more diversified portfolio (index fund). The index fund won't get you higher returns, but you will have a smoother ride.

Best wishes.
Andy
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

Wagnerjb wrote:LH said:
The reason I believe any given portfolio of individual stocks would be more likely to underperform an appropriately matched index is that they have unsystemic risks, which one should not be expected to be rewarded for bearing, while the index funds only have systemic risks, which one can reasonably expect to be rewarded for bearing. If I am bearing unrewarded risk in one basket, and only rewarded risk in another basket, all other things being equal(ER is perhaps unequal of course if thats what you are refering to?), the unrewarded risk basket should have a lower expected future value?

If its mostly just asset class picking, 90-100 percent or whatever, and an index captures that, without uncompensated risk, I would be hard pressed to expect a basket of stocks to beat a matched index in return on average going forward? Especially if one considers all possible baskets of stocks people pick, most of them are simply going to lose relative to the market right? The "free lunch" of indexing versus holding individual stocks is making the unsystemic risks dissapear largely, resulting in greater expected return.
With individual stocks, you have the exact same expected return as the index, but you have more volatility. The extra volatility is the "risk" that you eliminate with a more diversified portfolio (index fund). The index fund won't get you higher returns, but you will have a smoother ride.

Best wishes.
I agree on volatility of course.

Return will also expected to be lower in the real world long term. Just look at mutual funds that pick stocks, the expected value of going into an active stock picking mutual fund instead of an index fund is lower return, not just volatility concerns. (edited error 11/12)

"With individual stocks, you have the exact same expected return as the index, but you have more volatility."

To me, real risk is not just volatility. Take the individual stock of enron, or any bankrupted stock, that goes to zero. Sure thats volatility, but thats volatility that never comes back. Steady returns of zero, compounded forever is real risk. An index, in theory will always have volatility going forward, and individual stock may simple cease to exist, along with you entire investment. If an index always remains afloat, but many individual stock baskets hit that nice little zero and cease to exist, I posit thats going to skew stock investment average returns downward compared to index returns.

I also posit there are many more things that skew individual stocks baskets returns downward relative to indexes. I think demonstratebly, looking at mutual funds returns versus passive index funds return, index funds returns are higher on average right?
Post Reply