Sell Higher or Lower Basis first?

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NewMoneyMustBeSmart
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Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 4:16 pm

Summary: All things being equal, is it better to sell stock with a higher or lower basis? Under which circumstances does it depend?

Consider a scenario in which you hold a certain stock or asset with the same tax treatment. For this scenario let's consider you own 10k exercised/purchased shares of UBER - 5k with a basis of $1 and 5k with a basis of $10.

Current market value is $25.99.

If you only want to sell $100k of stock - should you sell the stock with the basis of $1 or the basis of $10?

My CPA recommended always selling the higher basis, and I think this makes sense as you are effectively deferring the higher tax amount.

In both scenarios, assume you previously exercised/purchased the stock.

What do you think or know?

bloom2708
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Re: Sell Higher or Lower Basis first?

Post by bloom2708 » Thu Nov 14, 2019 4:23 pm

Some of both.

Pair long term gains with long term losses. Net no tax due.

Pair short term gains with short term losses. Net no tax due.

If there are no/few losses, then you can still mix shares with minimal gain with shares with a larger gain. Just know the tax you will pay on short term gains and long term gains. If you sell $100k and there is $25k long term gains, then you pay tax based on where your income falls. 15% or 20%. There is also an extra tax for very high earners.

If you are in a low tax scenario (12% marginal bracket), then you can harvest the long term gains and pay 0% cap gains rate.
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HomeStretch
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Re: Sell Higher or Lower Basis first?

Post by HomeStretch » Thu Nov 14, 2019 4:25 pm

Depends.

If I had space to sell the lots with the lowest basis with zero capital gains, I might choose that route.

If I was in a high income/high tax year, I might choose to sell the lots with the highest basis.

Laika
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Re: Sell Higher or Lower Basis first?

Post by Laika » Thu Nov 14, 2019 4:28 pm

In general, sell the highest basis first, assuming you want to minimize the tax burden (given U.S. tax law).

A special case might be if your normal income is zero or low, in which case you have a choice, since I believe (in the U.S.) a certain amount of capital gains results in zero taxes. If only selling a small amount in one calendar year, go for the lowest basis stock.

The down-side of selling the highest basis stock first is that you will eventually have nothing left to sell but the lower-basis stock. That can result in painful levels of capital gains taxes that may even deter you from selling it at all.

A related issue is if you have multiple different stocks or funds. In that case, selling only the highest-basis stock can mess up your asset allocation. For example, at present, foreign stock has done worse than U.S. stock, so selling higher-basis foreign stock can result in over-weighting U.S. stock.
Last edited by Laika on Thu Nov 14, 2019 4:30 pm, edited 2 times in total.

aristotelian
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Re: Sell Higher or Lower Basis first?

Post by aristotelian » Thu Nov 14, 2019 4:28 pm

Completely depends on whether you expect your LTCG bracket to increase or decrease in the future. I am working near peak career earnings so I will defer tax as long as possible. If I was retired, I would harvest as much as I could staying within the 0% bracket.

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Mullins
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Re: Sell Higher or Lower Basis first?

Post by Mullins » Thu Nov 14, 2019 4:31 pm

What else is happening in your accounts this year, such as other realized gains/losses up to now, or distributions yet to be declared by year's end? How about carryover losses from previous year, if any? What other income will you be reporting? What tax bracket does it put you into? Then you'll have a more complete picture to help you figure out what to sell.

Look up Tax Loss Harvesting (TLH) for ideas.

fposte
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Re: Sell Higher or Lower Basis first?

Post by fposte » Thu Nov 14, 2019 4:35 pm

Additional factors: is there a Donor Advised Fund possibility? Is it likely that some assets will outlast you and get passed on to heirs with a step-up basis?

You also are saying "stock" rather than "fund"--if these are single stocks, I might also make decisions based on diversification of the portfolio and sell sectors I was overweighted in first.

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MN-Investor
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Re: Sell Higher or Lower Basis first?

Post by MN-Investor » Thu Nov 14, 2019 4:52 pm

I'm in a similar situation with stock of a previous employer. Half of the shares have a basis of about $2/share, half have a basis of about $61/share. There are four reasons I'll sell the higher basis stock first:

1) Smaller capital gains tax because of the higher basis

2) I'm too heavily weighted in my previous employer's stock. By selling the higher basis shares, I can sell more shares in one year and reduce that exposure.

3) The lower basis shares are great for funding my donor advised fund.

4) If I die tomorrow, my heirs will get a step-up basis in those low cost shares.
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MathIsMyWayr
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Re: Sell Higher or Lower Basis first?

Post by MathIsMyWayr » Thu Nov 14, 2019 7:08 pm

The only reason for the difference is tax. Since tax is not desirable, your goad should be to minimize the tax bite for both short and long term.

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GerryL
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Re: Sell Higher or Lower Basis first?

Post by GerryL » Thu Nov 14, 2019 7:22 pm

NewMoneyMustBeSmart wrote:
Thu Nov 14, 2019 4:16 pm
Summary: All things being equal, is it better to sell stock with a higher or lower basis? Under which circumstances does it depend?

All things are never equal. You do what makes sense in your tax situation in a given year.
I have a chunk of company stock. Every other year I am using low-cost-basis shares to fund my DAF. The high-cost-basis shares are there to tap if I need them. At this time there are no shares to use for tax-loss harvesting. At the rate I am going, the dividends I pull each year will shrink very gradually.

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NewMoneyMustBeSmart
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Re: Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 9:07 pm

bloom2708 wrote:
Thu Nov 14, 2019 4:23 pm
If you are in a low tax scenario (12% marginal bracket), then you can harvest the long term gains and pay 0% cap gains rate.
You make a good point - the amount you sell for LTCG can be influenced by your AGI or similar tax rate.

In my class it's all highest marginal tax rate for the next few years. Good problem to have.

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NewMoneyMustBeSmart
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Re: Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 9:08 pm

aristotelian wrote:
Thu Nov 14, 2019 4:28 pm
Completely depends on whether you expect your LTCG bracket to increase or decrease in the future. I am working near peak career earnings so I will defer tax as long as possible. If I was retired, I would harvest as much as I could staying within the 0% bracket.
I won't retire for 20 years and expect to be in the top bracket for the next 3 years.

This is concentrated wealth diversification, but there are reasons I don't want to dump it all on first oppty.

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NewMoneyMustBeSmart
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Re: Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 9:09 pm

MN-Investor wrote:
Thu Nov 14, 2019 4:52 pm
I'm in a similar situation with stock of a previous employer. Half of the shares have a basis of about $2/share, half have a basis of about $61/share. There are four reasons I'll sell the higher basis stock first:

1) Smaller capital gains tax because of the higher basis

2) I'm too heavily weighted in my previous employer's stock. By selling the higher basis shares, I can sell more shares in one year and reduce that exposure.

3) The lower basis shares are great for funding my donor advised fund.

4) If I die tomorrow, my heirs will get a step-up basis in those low cost shares.
In your scenario, I assume these stocks are owned/held - not options.

In that case, it's #2 moot? You're getting the same gross dollars of diversification regardless of basis, no?

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NewMoneyMustBeSmart
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Re: Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 9:13 pm

GerryL wrote:
Thu Nov 14, 2019 7:22 pm
NewMoneyMustBeSmart wrote:
Thu Nov 14, 2019 4:16 pm
Summary: All things being equal, is it better to sell stock with a higher or lower basis? Under which circumstances does it depend?

All things are never equal. You do what makes sense in your tax situation in a given year.
I have a chunk of company stock. Every other year I am using low-cost-basis shares to fund my DAF. The high-cost-basis shares are there to tap if I need them. At this time there are no shares to use for tax-loss harvesting. At the rate I am going, the dividends I pull each year will shrink very gradually.
You're right, it's never equal. Nor are there spherical cows, but it can be useful to consider those scenarios.

I have no interest in a DAF at this time. Putting $1M in DAF to get the deduction wouldn't change my marginal tax rate, so it's moot to this decision.

None of shares are tax loss - and currently none of my other investments are either, perhaps that may change.

The context is I have a plan to diversify my concentrated wealth (IPO-ed stock) over time, and trying to decide how to sequence it. All the concentrated wealth stock is very much in the money in and LTCG - and I'm in the top tax bracket for the next few years due to the gradual diversification, future vesting, and future grants.

aristotelian
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Re: Sell Higher or Lower Basis first?

Post by aristotelian » Thu Nov 14, 2019 9:40 pm

NewMoneyMustBeSmart wrote:
Thu Nov 14, 2019 9:08 pm
aristotelian wrote:
Thu Nov 14, 2019 4:28 pm
Completely depends on whether you expect your LTCG bracket to increase or decrease in the future. I am working near peak career earnings so I will defer tax as long as possible. If I was retired, I would harvest as much as I could staying within the 0% bracket.
I won't retire for 20 years and expect to be in the top bracket for the next 3 years.

This is concentrated wealth diversification, but there are reasons I don't want to dump it all on first oppty.
In that case I agree with your CPA. All that matters for diversification is the market value. At that point, you simply want to sell the same amount in the most tax efficient manner. If you are in the top tax bracket, it is a no brainer to sell the higher basis shares first and wait until you are in a lower bracket to sell the lower basis shares. The worst case scenario is that realizing more gains later pushes you back into your current bracket.

HomeStretch
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Re: Sell Higher or Lower Basis first?

Post by HomeStretch » Thu Nov 14, 2019 10:19 pm

+1. Use any market downturn as an opportunity to sell more (at lower gains) in order to diversify more quickly.

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MN-Investor
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Re: Sell Higher or Lower Basis first?

Post by MN-Investor » Thu Nov 14, 2019 10:22 pm

NewMoneyMustBeSmart wrote:
Thu Nov 14, 2019 9:09 pm
MN-Investor wrote:
Thu Nov 14, 2019 4:52 pm
I'm in a similar situation with stock of a previous employer. Half of the shares have a basis of about $2/share, half have a basis of about $61/share. There are four reasons I'll sell the higher basis stock first:

1) Smaller capital gains tax because of the higher basis

2) I'm too heavily weighted in my previous employer's stock. By selling the higher basis shares, I can sell more shares in one year and reduce that exposure.

3) The lower basis shares are great for funding my donor advised fund.

4) If I die tomorrow, my heirs will get a step-up basis in those low cost shares.
In your scenario, I assume these stocks are owned/held - not options.

In that case, it's #2 moot? You're getting the same gross dollars of diversification regardless of basis, no?
The shares are owned and it's not moot.

Assume I own 2,000 shares of employer stock currently selling for $77/share. Half have a $2 per share basis, half have $61 per share basis. If I sell the low basis shares, I'll have a $75,000 long term capital gain. If I sell the high basis shares, I'll have a $16,000 gain. In both cases I'll be reducing my former employer stock holding by 50%, but by selling the high basis shares I can accomplish that with a much smaller taxable gain and be left with more to invest in non-employer stock.
The key to success - Save early, save often, invest well.

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NewMoneyMustBeSmart
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Re: Sell Higher or Lower Basis first?

Post by NewMoneyMustBeSmart » Thu Nov 14, 2019 10:27 pm

MN-Investor wrote:
Thu Nov 14, 2019 10:22 pm

The shares are owned and it's not moot.

Assume I own 2,000 shares of employer stock currently selling for $77/share. Half have a $2 per share basis, half have $61 per share basis. If I sell the low basis shares, I'll have a $75,000 long term capital gain. If I sell the high basis shares, I'll have a $16,000 gain. In both cases I'll be reducing my former employer stock holding by 50%, but by selling the high basis shares I can accomplish that with a much smaller taxable gain and be left with more to invest in non-employer stock.
makes sense, thanks for walking through it. In the above example, you have diversified more because you've paid less to the tax man - got it - makes sense.

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