Bonus in Stock - sell or wait for LT CG

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exodus4224
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Joined: Thu Nov 14, 2019 11:39 am

Bonus in Stock - sell or wait for LT CG

Post by exodus4224 » Thu Nov 14, 2019 12:24 pm

Hi all

Have been a long time reader, first time poster.

my wife's company is going to pay their annual bonus out in shares, not in cash.

I'm interested in opinions as whether to sell right away or hold for a year before selling or what people have done in similar positions. also make sure my logic is sound

Because it's a granted shares I think the full amount would be subject to short term gains. At a federal level I think it will hit in the 32 or 35% marginal bracket. However we live in massachusetts where I believe the short term gain tax on capital assets is 12%. State long term capital gains tax is 5.2%.

I think the way to look at this is whether to diversify risk at a penalty of an additional 23.8% - 26.8% (17-20% at the federal + 6.8% state) or wait to realize long term. I suppose one could also consider how much risk there is of stock volatility causing the stock to drop more than that amount.

Obviously historical performance is no guarantee but the 52 week high and low is about a 30% spread.

once granted this would represent about 5.5% of our total equity position. Everything else is in index.

thanks for opinions in advance

fabdog
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Re: Bonus in Stock - sell or wait for LT CG

Post by fabdog » Thu Nov 14, 2019 1:03 pm

The stock bonus will be taxed at ordinary income rates.

Selling immediately would generate a likely very small gain/loss, depending on stock movement between date of record and sale. Holding for 1 year would get you long term treatment on whatever gain/loss you have on the stock after it was granted, not the value of the entire bonus

If holding the stock is not in line with your long term asset allocation, I'd sell right away. That's how I handled my employer stock RSU's

Mike

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Stinky
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Re: Bonus in Stock - sell or wait for LT CG

Post by Stinky » Thu Nov 14, 2019 1:08 pm

Welcome to the Board! Thanks for your question.

It sounds like you don’t want to hold this stock long term. If so, sell it as soon as you can. You’ll pay income tax at your marginal rate on the value and the grant date, and then will have a trivial gain or loss on the change in value between date of grant and date of sale.
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misterjohnny
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Re: Bonus in Stock - sell or wait for LT CG

Post by misterjohnny » Thu Nov 14, 2019 1:56 pm

At my company I have received stock grants every year (after a three year vesting period). It is taxed as ordinary income, and shows up on my W2. The company sells some of the stock before i even get it, to pay payroll taxes on it and to do withholdings. I suspect the same will happen to you. If they do not take out withholdings, you may have to do that yourself.

As for selling it right away, the previous poster is correct in that the grant date is your effective "purchase date" for cost basis. I always sell my stock ASAP and transfer proceeds to my Vanguard account for investing in my regular asset allocation. No regrets, no coulda, shoulda, woulda.

Just yesterday I was talking with a coworker who never sold any of her stock, just out of laziness. I asked her what if our company turned into an Enron? :shock:

dbr
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Re: Bonus in Stock - sell or wait for LT CG

Post by dbr » Thu Nov 14, 2019 1:58 pm

fabdog wrote:
Thu Nov 14, 2019 1:03 pm
The stock bonus will be taxed at ordinary income rates.

Selling immediately would generate a likely very small gain/loss, depending on stock movement between date of record and sale. Holding for 1 year would get you long term treatment on whatever gain/loss you have on the stock after it was granted, not the value of the entire bonus

If holding the stock is not in line with your long term asset allocation, I'd sell right away. That's how I handled my employer stock RSU's

Mike
Right. If one is thinking that holding the stock will mean the entire benefit is taxed at LT rates, I'm pretty sure that is a mistake. What would be taxed as long term gain would be any increase in the value from the value at grant after a year, and short term gain if for less than a year. The original bonus as explained above is not taxed as a short term gain but as ordinary income. The rate is the same but it is not the same kind of income at all. One difference would be in how other gains and losses and loss carryover might be applied. I might be missing something, of course.

Topic Author
exodus4224
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Joined: Thu Nov 14, 2019 11:39 am

Re: Bonus in Stock - sell or wait for LT CG

Post by exodus4224 » Fri Nov 15, 2019 12:47 pm

OP Here.

Thanks all for you input. I think I probably overthought this and made it more complex than it was. It makes sense that this is should work like all the other stock grants. Glad you guys are here to maintain sanity :happy

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