Divesting from funds - selling now vs. later, and tax implications

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achristinekim
Posts: 11
Joined: Sun Jun 07, 2020 10:19 am

Divesting from funds - selling now vs. later, and tax implications

Post by achristinekim »

Hello Bogleheads,

My partner and I just invested in a few funds (about two months ago), but I'm looking to completely divest from them and move to more ethical alternatives, as I belatedly realised our investments were going into dodgy companies (e.g. private prisons, deforestation, firearms)...I'd like advice on TIMING of selling funds, in terms of tax implications.

What I know so far about taxes
  • LT capital gains = held >1 year. Treated differently, tax-wise, than ST cap gains (<1 yr). Taxed at 15% of income tax rate (for now...Biden admin may change this, but unlikely to retroactively apply it).
  • ST cap gains are taxed at the same income tax rate.
  • Caveat: if have losses, can sell assets and “realise” the loss.
  • Use ST loss to offset ST gain (and LT gain ← can carry forward to future years)
  • CanNOT use LT loss to offset ST gain
  • If ST gain/loss is small, consider selling immediately and reinvesting in new investments
  • Illustration: Say sell one asset at $4,000 loss, and another at $1,000 gain. Can use $1,000 from the $4,000 loss to offset the $1,000 gain (netting at zero tax) and use up to $3,000 of the $4,000 loss ($3,000 is the limit) to decrease income by $3,000, thereby decreasing total income tax.
Finally, as we live in a high-tax country (the UK), and we'll collectively make ~$150k in 2021, I'm pretty confident that we will end up paying quite little, if any, US taxes for 2021.

Our investments' ST gains
  • My partner's brokerage: $755 net gain
  • My brokerage: $492 net gain
  • My roth IRA: $422 net gain
QUESTIONS
If you were me, would you:
  • a) Sell now, and eat the cost of being taxed 100% for the ~$1,600 in net gains you acquired? In return, you'd be able to reinvest in more ethical alternatives, and have that investment accrue gains immediately!
  • b) Wait a year to sell, in order to be taxed at 15% the rate? This would, however, mean that you wait another 10 months, letting the current investments continue accruing gains, so the 15% rate will be on the bigger pot of gains...
[Additional Q on selling and buying funds in a roth IRA account: how are these gains taxed? If the roth IRA is a tax-free account, are the gains/losses somehow treated the same? Or are they treated as if they were in a taxable brokerage account? Mega confused!]

Thank you all in advance for your help! This community has been a lifesaver for me in the past...if there's anything that's unclear, please let me know; I'll clarify any confusion!
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retired@50
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Location: Living in the U.S.A.

Re: Divesting from funds - selling now vs. later, and tax implications

Post by retired@50 »

Have you seen this wiki page?

https://www.bogleheads.org/wiki/Paying_ ... itch_funds

It discusses some of the tax implications of selling a fund.

Regards,
This is one person's opinion. Nothing more.
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Stinky
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Location: Sweet Home Alabama

Re: Divesting from funds - selling now vs. later, and tax implications

Post by Stinky »

achristinekim wrote: Mon May 03, 2021 9:05 am If you were me, would you:
  • a) Sell now, and eat the cost of being taxed 100% for the ~$1,600 in net gains you acquired? In return, you'd be able to reinvest in more ethical alternatives, and have that investment accrue gains immediately!
Why do you think you’d be taxed at 100% on anything? The tax rate on short term gains is a lot less than that.

Since you’ve only been invested for a short time and the gains are pretty nominal, I’d sell and reinvest in the way that I want.
It's a GREAT day to be alive! - Travis Tritt
exodusNH
Posts: 156
Joined: Wed Jan 06, 2021 8:21 pm

Re: Divesting from funds - selling now vs. later, and tax implications

Post by exodusNH »

achristinekim wrote: Mon May 03, 2021 9:05 am Finally, as we live in a high-tax country (the UK), and we'll collectively make ~$150k in 2021, I'm pretty confident that we will end up paying quite little, if any, US taxes for 2021.

Our investments' ST gains
  • My partner's brokerage: $755 net gain
  • My brokerage: $492 net gain
  • My roth IRA: $422 net gain
QUESTIONS
If you were me, would you:
  • a) Sell now, and eat the cost of being taxed 100% for the ~$1,600 in net gains you acquired? In return, you'd be able to reinvest in more ethical alternatives, and have that investment accrue gains immediately!
  • b) Wait a year to sell, in order to be taxed at 15% the rate? This would, however, mean that you wait another 10 months, letting the current investments continue accruing gains, so the 15% rate will be on the bigger pot of gains...
[Additional Q on selling and buying funds in a roth IRA account: how are these gains taxed? If the roth IRA is a tax-free account, are the gains/losses somehow treated the same? Or are they treated as if they were in a taxable brokerage account? Mega confused!]
I cannot speak for UK tax law.

From the US' perspective, the Roth IRA won't incur any taxes. (And you can't readily claim losses.)

For the other two accounts, the gains will simply add to your income for the year. It's no different than earning interest from a bank. If you're in the 24% bracket, you'll pay roughly 1/4th of your gains as tax.

You also reset your tax basis by purchasing the new funds. When you sell in the future, you'll start from a higher cost, meaning less to tax. (Some people call this tax gain harvesting when done intentionally.)
sycamore
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Re: Divesting from funds - selling now vs. later, and tax implications

Post by sycamore »

achristinekim wrote: Mon May 03, 2021 9:05 am ...
Finally, as we live in a high-tax country (the UK), and we'll collectively make ~$150k in 2021, I'm pretty confident that we will end up paying quite little, if any, US taxes for 2021.
Side note: If you don't get the answers you need here, please note there is a Non-US Investing sub-forum on Bogleheads where you may get better/more detail answers.
Doctor Rhythm
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Joined: Mon Jan 22, 2018 3:55 am

Re: Divesting from funds - selling now vs. later, and tax implications

Post by Doctor Rhythm »

achristinekim wrote: Mon May 03, 2021 9:05 am
QUESTIONS
If you were me, would you:
  • a) Sell now, and eat the cost of being taxed 100% for the ~$1,600 in net gains you acquired? In return, you'd be able to reinvest in more ethical alternatives, and have that investment accrue gains immediately!
  • b) Wait a year to sell, in order to be taxed at 15% the rate? This would, however, mean that you wait another 10 months, letting the current investments continue accruing gains, so the 15% rate will be on the bigger pot of gains...
[Additional Q on selling and buying funds in a roth IRA account: how are these gains taxed? If the roth IRA is a tax-free account, are the gains/losses somehow treated the same? Or are they treated as if they were in a taxable brokerage account? Mega confused!]
I don’t understand option (a) - where does the 100% tax come from? In the US, you’d pay your marginal income tax rate on these short term gains. Like the other posters, I don’t know enough about UK tax law to know how it would treat this. For option (b), don’t assume that the “pot of gains” will be bigger in 10 months than now. It could easily be smaller, or you might have a net loss in that time frame.

Bottom line though: you only have a STCG of < $1300 (money in the Roth isn’t taxed - gains or losses there have no effect on your taxes). The net tax advantage of waiting for it to become LTCG, assuming no further growth, is going to be maybe around $100. As a couple earning $150K, do you really want to angst over that sum? If not, then sell now and reinvest.
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Wiggums
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Re: Divesting from funds - selling now vs. later, and tax implications

Post by Wiggums »

Since you’ve only been invested for two months, I’d sell and reinvest as you want.
Topic Author
achristinekim
Posts: 11
Joined: Sun Jun 07, 2020 10:19 am

Re: Divesting from funds - selling now vs. later, and tax implications

Post by achristinekim »

Bogleheads - thank you ALL! Very grateful for your advice (and correction of my clear ignorance on some of these issues...)

Re: the question on 100%, yes I see that was a misunderstanding on my part. I must have misinterpreted what an investment advisor had told me; thank you for clarifying.

Again, thank you. I will go do some deep research into alternative funds to buy once I sell what we have. :)
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