Capital Gains Tax Strategy

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2 Tasty
Posts: 51
Joined: Tue Jul 28, 2015 9:36 am

Capital Gains Tax Strategy

Post by 2 Tasty »

Consider the situation where you will be liquidating a good chunk of (Vanguard mutual fund) stocks in the near future (in my case for a home down-payment). What tax strategy would you choose for selecting which shares to sell?

1) Minimize tax rate (sell only long-term capital gains with the lowest proportion of gains (and short-term losses)); this of course sets up the potential to minimize taxes from a long-term perspective, should one sell more stock in the future.
2) Minimize taxes for the current year (sell a blend of short-term and long-term capital gains, so that each lot minimizes the percentage of gains for that lot times the relative tax burden); this should minimize current-year tax burdens.
3) Some other tax strategy that I'm not considering?
bradpevans
Posts: 801
Joined: Sun Apr 08, 2018 1:09 pm

Re: Capital Gains Tax Strategy

Post by bradpevans »

2 Tasty wrote: Sat Jun 16, 2018 11:17 am Consider the situation where you will be liquidating a good chunk of (Vanguard mutual fund) stocks in the near future (in my case for a home down-payment). What tax strategy would you choose for selecting which shares to sell?

1) Minimize tax rate (sell only long-term capital gains with the lowest proportion of gains (and short-term losses)); this of course sets up the potential to minimize taxes from a long-term perspective, should one sell more stock in the future.
2) Minimize taxes for the current year (sell a blend of short-term and long-term capital gains, so that each lot minimizes the percentage of gains for that lot times the relative tax burden); this should minimize current-year tax burdens.
3) Some other tax strategy that I'm not considering?

Does your (typical) ordinary income place you in the 0 or 20 LTCG bucket? If not it’s pay me now or pay me later in that you will get hit for 15% now or later

If you can use losses against income that may be preferable (assuming income tax rate is greater than your LTCG rate)
bradpevans
Posts: 801
Joined: Sun Apr 08, 2018 1:09 pm

Re: Capital Gains Tax Strategy

Post by bradpevans »

2 Tasty wrote: Sat Jun 16, 2018 11:17 am Consider the situation where you will be liquidating a good chunk of (Vanguard mutual fund) stocks in the near future (in my case for a home down-payment). What tax strategy would you choose for selecting which shares to sell?

1) Minimize tax rate (sell only long-term capital gains with the lowest proportion of gains (and short-term losses)); this of course sets up the potential to minimize taxes from a long-term perspective, should one sell more stock in the future.
2) Minimize taxes for the current year (sell a blend of short-term and long-term capital gains, so that each lot minimizes the percentage of gains for that lot times the relative tax burden); this should minimize current-year tax burdens.
3) Some other tax strategy that I'm not considering?

Does your (typical) ordinary income place you in the 0 or 20 LTCG bucket? If not it’s pay me now or pay me later in that you will get hit for 15% now or later

If you can use losses against income that may be preferable (assuming income tax rate is greater than your LTCG rate)
Topic Author
2 Tasty
Posts: 51
Joined: Tue Jul 28, 2015 9:36 am

Re: Capital Gains Tax Strategy

Post by 2 Tasty »

bradpevans wrote: Sat Jun 16, 2018 2:57 pm
Does your (typical) ordinary income place you in the 0 or 20 LTCG bucket? If not it’s pay me now or pay me later in that you will get hit for 15% now or later

If you can use losses against income that may be preferable (assuming income tax rate is greater than your LTCG rate)
I'm in the 15% for LTCG, but pay later is obviously preferred over pay now.

I do plan to maximize losses, but there haven't been too many that haven't already been tax loss harvested.
aristotelian
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Re: Capital Gains Tax Strategy

Post by aristotelian »

bradpevans wrote: Sat Jun 16, 2018 2:57 pm
Does your (typical) ordinary income place you in the 0 or 20 LTCG bucket? If not it’s pay me now or pay me later in that you will get hit for 15% now or later

If you can use losses against income that may be preferable (assuming income tax rate is greater than your LTCG rate)
You may not have to pay later if you are in the 0% LTCG bracket in retirement. Just something to consider.
retired early&luv it
Posts: 137
Joined: Sun Feb 22, 2015 7:52 am

Re: Capital Gains Tax Strategy

Post by retired early&luv it »

I sold a lot in the last year. My strategy was:

I had one fund that I did not want to sell, that fund is closed to new investors and limits additional purchases to existing fund owners. Thus if I sold some of it, I would not be able to buy much of it back later. It is a great fund, so that fund I am not touching.

My other funds, I only sold long term gainers. But I expect to be in the 24 percent bracket this year, thus it is the difference between 15 and 24 percent. What bracket do you expect to be in this year? If a lower bracket, would the additional tax hit be significant or not? Don't forget to check state tax bracket too.

I sold based on cost basis - specific identification - to allow me to sell the most shares with the least amount of taxable gain. Some of the sales I made were shares where less than 10 percent of my sale was actual taxable capital gain. That allowed me to sell a lot of funds for little taxable gain. But I have funds where over half of the value is actual capital gain, those funds were not sold because the taxable cost to sell would have been very high.

Are there funds that you like and funds you are are not happy with? That is another factor. But that was not a factor for me, my four funds that I own I like them all.
cherijoh
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Location: Charlotte NC

Re: Capital Gains Tax Strategy

Post by cherijoh »

2 Tasty wrote: Sat Jun 16, 2018 11:17 am Consider the situation where you will be liquidating a good chunk of (Vanguard mutual fund) stocks in the near future (in my case for a home down-payment). What tax strategy would you choose for selecting which shares to sell?

1) Minimize tax rate (sell only long-term capital gains with the lowest proportion of gains (and short-term losses)); this of course sets up the potential to minimize taxes from a long-term perspective, should one sell more stock in the future.
2) Minimize taxes for the current year (sell a blend of short-term and long-term capital gains, so that each lot minimizes the percentage of gains for that lot times the relative tax burden); this should minimize current-year tax burdens.
3) Some other tax strategy that I'm not considering?
Personally, I would avoid paying short-term capital gains at my ordinary income-tax rate. But I would run it through TaxCaster to ensure against weird scenarios like Method #1 pushing more LT cap gains into the 15% tax bracket and resulting in significantly higher taxes now vs. Method #2. If you have been using DCA and haven't already sold some of your lots, I think this scenario is unlikely. But if you have already sold shares (as you indicated that you did) and now only have highly appreciated shares and recently purchased ones it could be a factor.
Topic Author
2 Tasty
Posts: 51
Joined: Tue Jul 28, 2015 9:36 am

Re: Capital Gains Tax Strategy

Post by 2 Tasty »

Thanks everyone for the suggestions. I'm leaning toward method 2, minimizing current-year taxes, with a slight bias toward long-term. My short-term capital gains rate is almost double that of long-term rates considering federal and state, so I will go with a 2-to-1 burden. Here's my planned algorithm:

1) Calculate for each lot of shares percentage of taxable gains over entire amount.
2) For short-term gains, multiply the taxable percentage by 0.3 (actual combined federal and state is 0.294).
3) For long-term gains, multiply the taxable percentage by 0.15 (actual combined federal and state is 0.161).
4) Sell lots by calculated lowest tax burden until required amount has been sold.
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