Tax-wise, might short-term gains be better than long-term? (in this case)

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Topic Author
CFM300
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Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » 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?

annu
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by annu » Fri May 22, 2020 2:24 pm

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.

terran
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by terran » Fri May 22, 2020 2:31 pm

Edit: incomplete double post. See below.
Last edited by terran on Fri May 22, 2020 2:38 pm, edited 2 times in total.

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » Fri May 22, 2020 2:37 pm

annu wrote:
Fri May 22, 2020 2:24 pm
you are selling different amounts, If you sold same amount in short term, will be paying more in taxes as well.
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.
annu wrote:
Fri May 22, 2020 2:24 pm
Personally I keep until long term, unless need money.
I need the money. So Option B is better, correct?

terran
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by terran » Fri May 22, 2020 2:37 pm

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.

annu
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by annu » Fri May 22, 2020 2:40 pm

CFM300 wrote:
Fri May 22, 2020 2:37 pm
annu wrote:
Fri May 22, 2020 2:24 pm
you are selling different amounts, If you sold same amount in short term, will be paying more in taxes as well.
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.
annu wrote:
Fri May 22, 2020 2:24 pm
Personally I keep until long term, unless need money.
I need the money. So Option B is better, correct?
Sorry missed that part. Yeah in that case if goal is to minimize tax payment, makes sense with short term, as gains are lower.

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » Fri May 22, 2020 2:41 pm

terran wrote:
Fri May 22, 2020 2:31 pm
What your analysis is missing is what happens in the future?
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.

terran
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by terran » Fri May 22, 2020 2:55 pm

CFM300 wrote:
Fri May 22, 2020 2:41 pm
terran wrote:
Fri May 22, 2020 2:31 pm
What your analysis is missing is what happens in the future?
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.
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.

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » 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.

retired@50
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by retired@50 » Fri May 22, 2020 5:40 pm

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.
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.

Regards,
This is one person's opinion. Nothing more.

annu
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by annu » Fri May 22, 2020 11:04 pm

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)

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » Sun May 24, 2020 11:26 pm

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.
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.

the way
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by the way » Mon May 25, 2020 12:04 am

CFM300 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?
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

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » Mon May 25, 2020 12:50 am

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
Thanks for the clever suggestion, but these are not all of the shares that I hold.

And though I do have some realized losses to offset some of the gains, I have no unrealized losses to harvest.

the way
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by the way » Mon May 25, 2020 11:48 am

CFM300 wrote:
Mon May 25, 2020 12:50 am
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
Thanks for the clever suggestion, but these are not all of the shares that I hold.

And though I do have some realized losses to offset some of the gains, I have no unrealized losses to harvest.
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 by

- 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.

Topic Author
CFM300
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Re: Tax-wise, might short-term gains be better than long-term? (in this case)

Post by CFM300 » Mon May 25, 2020 12:56 pm

the way wrote:
Mon May 25, 2020 11:48 am
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.
Agreed. The problem is that I don't know whether I'll need to sell more lots next year.
the way wrote:
Mon May 25, 2020 11:48 am
If you don't think you will need to sell both lots, then you could still try the average basis method by...
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.

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