Tax-wise, might short-term gains be better than long-term? (in this case)
Tax-wise, might short-term gains be better than long-term? (in this case)
Suppose that I need to sell $100,000 worth of shares in a stock fund in a taxable account.
• 22% federal marginal tax rate
• 15% federal long-term capital gains rate
• 9.3% California marginal tax rate (no LTCG rate)
Option A
Sell old lots with long-term gains and basis of $50,000.
Tax = $50,000 (long-term gain) X 24.3% <-- (15% + 9.3%)
Tax - $12,150
Option B
Sell recent lots with short-term gains and basis of $80,000.
Tax = $20,000 (short-term gain) X 31.3% <-- (22% + 9.3%)
Tax = $6,260
Note
The recent lots with the short-term gain have met the 60-day holding period for qualified dividends, so there's no additional tax consequence in that respect.
Conclusion
Even though I’ll pay tax at a higher rate by selling the lots with short-term gains, the absolute amount is less (nearly half) and thus the better choice.
Questions
Am I thinking about this correctly?
Am I overlooking anything?
• 22% federal marginal tax rate
• 15% federal long-term capital gains rate
• 9.3% California marginal tax rate (no LTCG rate)
Option A
Sell old lots with long-term gains and basis of $50,000.
Tax = $50,000 (long-term gain) X 24.3% <-- (15% + 9.3%)
Tax - $12,150
Option B
Sell recent lots with short-term gains and basis of $80,000.
Tax = $20,000 (short-term gain) X 31.3% <-- (22% + 9.3%)
Tax = $6,260
Note
The recent lots with the short-term gain have met the 60-day holding period for qualified dividends, so there's no additional tax consequence in that respect.
Conclusion
Even though I’ll pay tax at a higher rate by selling the lots with short-term gains, the absolute amount is less (nearly half) and thus the better choice.
Questions
Am I thinking about this correctly?
Am I overlooking anything?
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
So paying 24% vs 30%+, total amount in taxes is different, as you are selling different amounts, If you sold same amount in short term, will be paying more in taxes as well.
Personally I keep until long term, unless need money.
Personally I keep until long term, unless need money.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Edit: incomplete double post. See below.
Last edited by terran on Fri May 22, 2020 2:38 pm, edited 2 times in total.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
I'm selling $100,000 worth of shares in both cases.
In Option A I'm selling $100,000 with a cost basis of $50,000 and a long-term gain of $50,000.
In Option B I'm selling $100,000 with a cost basis of $80,000 and a short-term gain of $20,000.
I need the money. So Option B is better, correct?
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
In the immediate term you're right that you'll end up paying less tax to get the same amount of cash. What your analysis is missing is what happens in the future?
If you sell the less appreciated fund with short term gains then in the end you'll end up owning a more appreciated fund with long term gains. If instead you sell the more appreciated fund with long term gains then you'll end up with a less appreciated fund with long term gains once the short term gains go long term.
I would say this is kind of similar to the Roth vs traditional math. If you expect to be in a lower tax bracket in the future then selling the less appreciated fund might make sense even though the tax rate will be higher because you'll pay lower tax in the future on the more appreciated fund. But if your tax rate will be the same or higher then you'd be better off selling the long term fund now and waiting until the rate on the short term fund drops (due to becoming long term) since you'll still have to pay the tax on the long term fund whether you sell now or later.
If you sell the less appreciated fund with short term gains then in the end you'll end up owning a more appreciated fund with long term gains. If instead you sell the more appreciated fund with long term gains then you'll end up with a less appreciated fund with long term gains once the short term gains go long term.
I would say this is kind of similar to the Roth vs traditional math. If you expect to be in a lower tax bracket in the future then selling the less appreciated fund might make sense even though the tax rate will be higher because you'll pay lower tax in the future on the more appreciated fund. But if your tax rate will be the same or higher then you'd be better off selling the long term fund now and waiting until the rate on the short term fund drops (due to becoming long term) since you'll still have to pay the tax on the long term fund whether you sell now or later.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Sorry missed that part. Yeah in that case if goal is to minimize tax payment, makes sense with short term, as gains are lower.CFM300 wrote: ↑Fri May 22, 2020 2:37 pmI'm selling $100,000 worth of shares in both cases.
In Option A I'm selling $100,000 with a cost basis of $50,000 and a long-term gain of $50,000.
In Option B I'm selling $100,000 with a cost basis of $80,000 and a short-term gain of $20,000.
I need the money. So Option B is better, correct?
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Good point and good analysis. Thank you.
If tax rates stay the same, then I'll likely have lower taxes. I'll have less income and might have moved to a state with lower taxes on capital gains as well.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
In that case it seems likely you're still better off selling the short term gains now. Assuming they're both the same investment (so no need to account for differences in appreciation) the extra $30k of long term gains would need to be taxed at ($12150-6260)/30k = 19.6% in the future to make this not worth doing. Lower than your current LTCG rate, but much higher than your likely state tax rate if your federal rate will be 0%, so better to defer those gains.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
@terran,
You're helping me realize that this is more complicated than I originally thought.
If I'll need to sell $100,000 worth of equities next year as well, then I'll be better off selling the long-term shares now and waiting until the short-term shares become long-term.
I'll need to think about this some more.
You're helping me realize that this is more complicated than I originally thought.
If I'll need to sell $100,000 worth of equities next year as well, then I'll be better off selling the long-term shares now and waiting until the short-term shares become long-term.
I'll need to think about this some more.
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Couldn't you sell a mixture of shares that includes short and long term gains? This way, if you need more money next year, you'll retain some options.CFM300 wrote: ↑Fri May 22, 2020 5:36 pm @terran,
You're helping me realize that this is more complicated than I originally thought.
If I'll need to sell $100,000 worth of equities next year as well, then I'll be better off selling the long-term shares now and waiting until the short-term shares become long-term.
I'll need to think about this some more.
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
But if shares have appreciated more, dont you have more room to absorb losses if price goes down?
I always sell shares where gains are lowest, as I feel wherever I have buffer, I can keep them longer, and use the dividends(only talking about individual stock)
I always sell shares where gains are lowest, as I feel wherever I have buffer, I can keep them longer, and use the dividends(only talking about individual stock)
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
I think this is what I'll end up doing, since I'm still not certain which option is best, and taking the middle road will minimize future regret.retired@50 wrote: ↑Fri May 22, 2020 5:40 pm Couldn't you sell a mixture of shares that includes short and long term gains? This way, if you need more money next year, you'll retain some options.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
if these are all the shares you hold and it's a mutual fund, you can check out this post for an option C viewtopic.php?f=1&t=299033&p=4922607#p4922607CFM300 wrote: ↑Fri May 22, 2020 1:13 pm Suppose that I need to sell $100,000 worth of shares in a stock fund in a taxable account.
• 22% federal marginal tax rate
• 15% federal long-term capital gains rate
• 9.3% California marginal tax rate (no LTCG rate)
Option A
Sell old lots with long-term gains and basis of $50,000.
Tax = $50,000 (long-term gain) X 24.3% <-- (15% + 9.3%)
Tax - $12,150
Option B
Sell recent lots with short-term gains and basis of $80,000.
Tax = $20,000 (short-term gain) X 31.3% <-- (22% + 9.3%)
Tax = $6,260
Note
The recent lots with the short-term gain have met the 60-day holding period for qualified dividends, so there's no additional tax consequence in that respect.
Conclusion
Even though I’ll pay tax at a higher rate by selling the lots with short-term gains, the absolute amount is less (nearly half) and thus the better choice.
Questions
Am I thinking about this correctly?
Am I overlooking anything?
another idea is to find TLH of 20k somewhere
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Thanks for the clever suggestion, but these are not all of the shares that I hold.the way wrote: ↑Mon May 25, 2020 12:04 am if these are all the shares you hold and it's a mutual fund, you can check out this post for an option C viewtopic.php?f=1&t=299033&p=4922607#p4922607
another idea is to find TLH of 20k somewhere
And though I do have some realized losses to offset some of the gains, I have no unrealized losses to harvest.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
If you will definitely sell the other lot next year, then you should just do option A so that you pay LTCG on the entire 70k. If you don't think you will need to sell both lots, then you could still try the average basis method byCFM300 wrote: ↑Mon May 25, 2020 12:50 amThanks for the clever suggestion, but these are not all of the shares that I hold.the way wrote: ↑Mon May 25, 2020 12:04 am if these are all the shares you hold and it's a mutual fund, you can check out this post for an option C viewtopic.php?f=1&t=299033&p=4922607#p4922607
another idea is to find TLH of 20k somewhere
And though I do have some realized losses to offset some of the gains, I have no unrealized losses to harvest.
- open a new account
- xfer the 2 lots over
- set average basis
- sell 1/2
- pay LTCG tax on 35k (about 8.5k)
You could probably even xfer the other 1/2 back to your original account afterwards if you wanted (btw all this is speculation and you should verify it with your broker first).
Note also the total difference we are talking is 7% of 20k, or $1400.
Re: Tax-wise, might short-term gains be better than long-term? (in this case)
Agreed. The problem is that I don't know whether I'll need to sell more lots next year.
I appreciate your further explaining your clever strategy, but for various reasons I'll just go the simpler route of selling a mix.
Thanks for your help.