Talk me into diversifying ... (high tax burden)

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nickoli
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Talk me into diversifying ... (high tax burden)

Post by nickoli »

Hi Bogleheads.

Here's my situation. I've been blessed to have built up a substantial position in an individual stock currently worth $5.4M, with a cost basis of about $150k. The rest of my portfolio is mostly total market index + some bonds ($2.2M). So this individual stock represents 70% of my portfolio.

Yes, yes, I know. Diversification! However, I'm a high earner with a combined tax rate of 34%, in a high tax state. (LT cap gains: 20% federal + 10.3% state, +3.8% NIIT)

If I liquidated the entire position today, I'd owe $1.8M in taxes, being left with $3.6M. (woe is me, right?)

What would you do?
- Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
- move to a low-tax state (save $500k)
- Hold on and diversify when in a lower-income year later on
- Just take the tax hit and diversify now
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Re: Talk me into diversifying ... (high tax burden)

Post by BirdFood »

I would take the tax hit now.
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Re: Talk me into diversifying ... (high tax burden)

Post by RetiredAL »

BirdFood wrote: Fri Jul 05, 2024 1:36 am I would take the tax hit now.
+1

If me, I'd sell 75-80% of it tomorrow.
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Re: Talk me into diversifying ... (high tax burden)

Post by doobiedoo »

For me, it would depend on the stock.
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Re: Talk me into diversifying ... (high tax burden)

Post by turing17 »

Check this thread. viewtopic.php?t=430457

I am in a similar boat
moneyflowin
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Re: Talk me into diversifying ... (high tax burden)

Post by moneyflowin »

1. Psychologically convince yourself that you don't really have $5.4M. You only have $3.6M plus an interest-free $1.8M loan from the IRS, and you must repay the loan

2. Otherwise look into charitable remainder trusts.

Either way there's no free lunch. You'd have to pay the IRS or the charity
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

I was in a similar situation about 20 years ago.

Except I had 80% of assets in one stock. And I would be taxed at full ordinary income tax rates, rather than capital gains rates, when I sold.

At the first possible date, I sold down my excess position in that single stock.

I paid the hefty tax bill.

I went on with my life.

I never felt better. Financially, that is.
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Re: Talk me into diversifying ... (high tax burden)

Post by dogagility »

nickoli wrote: Fri Jul 05, 2024 1:26 am What would you do?
- Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
Seems drastic. You said you're a high earner, so there would be missing income to include in the decision. Could you easily pick up where you left off?

What if the stock takes a 1.8MM hit during this time? Then you've quit your job for no monetary benefit.
- move to a low-tax state (save $500k)
Another seemingly drastic action... unless you already plan to move.
- Hold on and diversify when in a lower-income year later on
It's an option. Are you feeling lucky... holding this large position is essentially gambling with 3.6MM on the table.
- Just take the tax hit and diversify now
If you don't need this 3.6MM, then it doesn't matter what you do. If your lifestyle would be significantly impacted by having a large loss in this position, then I would sell immediately and diversify.
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Re: Talk me into diversifying ... (high tax burden)

Post by Sandtrap »

nickoli wrote: Fri Jul 05, 2024 1:26 am Hi Bogleheads.

Here's my situation. I've been blessed to have built up a substantial position in an individual stock currently worth $5.4M, with a cost basis of about $150k. The rest of my portfolio is mostly total market index + some bonds ($2.2M). So this individual stock represents 70% of my portfolio.

Yes, yes, I know. Diversification! However, I'm a high earner with a combined tax rate of 34%, in a high tax state. (LT cap gains: 20% federal + 10.3% state, +3.8% NIIT)

If I liquidated the entire position today, I'd owe $1.8M in taxes, being left with $3.6M.
(woe is me, right?)

What would you do?
- Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
- move to a low-tax state (save $500k)
- Hold on and diversify when in a lower-income year later on
- Just take the tax hit and diversify now
to op:

notes and questions:
Some bigger more comprehensive perspectives from your data, more data would help:

1
If you do nothing for 1 year and the individual stock value goes from 5.4 million to 6.4 million, would you have looked back and be glad you hung onto it?
2
What is it right now, financially or otherwise, that is the impetus to sell this stock?
Logic, spreadsheet, numbers, "gut feeling for right timing (sell now)?
3
You mention "hold on and diversify when in a lower income year later"...
And you mention moving to a lower tax state.....
so
What is happening now that predicts "moving" and "lower income"?
4
What will you do with the 3.6 million (net)?
Add to existing portfolio distributed to retain AA?
Buy a 50 unit apartment building for the tax (and tax shelter) and asset diversification benefits?
What?
5
How many years are you away from retirement?

j :D
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Re: Talk me into diversifying ... (high tax burden)

Post by KlangFool »

My family member lost 10 million in Telecom Bust. Sell it all now.

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Re: Talk me into diversifying ... (high tax burden)

Post by livesoft »

nickoli wrote: Fri Jul 05, 2024 1:26 am What would you do?
- Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
- move to a low-tax state (save $500k)
- Hold on and diversify when in a lower-income year later on
- Just take the tax hit and diversify now
The above reads to me like you would get paid $500K to take a year-long vacation to another state. Maybe you can thru-hike the Appalachian Trail, the Continental Divide Trail, and the Pacific Crest Trail all in the same year on your vacation. Or do some trekking in Nepal and Patagonia and those regions.
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Re: Talk me into diversifying ... (high tax burden)

Post by TomatoTomahto »

BirdFood wrote: Fri Jul 05, 2024 1:36 am I would take the tax hit now.
There’s no other answer for a Boglehead. Congrats OP. It’s only a problem if you frame it as that.
Last edited by TomatoTomahto on Fri Jul 05, 2024 7:13 am, edited 1 time in total.
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Re: Talk me into diversifying ... (high tax burden)

Post by Outer Marker »

What's the stock?

Berkshire Hathaway - Hold
Nvidia - sell
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Re: Talk me into diversifying ... (high tax burden)

Post by Target2019 »

I would take off 2 years and be really happy.
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Re: Talk me into diversifying ... (high tax burden)

Post by TomatoTomahto »

Outer Marker wrote: Fri Jul 05, 2024 7:06 am What's the stock?

Berkshire Hathaway - Hold
Nvidia - sell
Haha, you sort of caught me in my immediately previous post, which I've edited. We have a share of BRK.A which has experienced a lot of gains and we are keeping for our heirs to benefit from the stepped-up basis. A major difference to OP's situtation, though, is that it's much less than 70% of our portfolio.

So, I guess I'd take the tax hit on at least half of the one stock.
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

Stinky wrote: Fri Jul 05, 2024 5:04 am I was in a similar situation about 20 years ago.

Except I had 80% of assets in one stock. And I would be taxed at full ordinary income tax rates, rather than capital gains rates, when I sold.

At the first possible date, I sold down my excess position in that single stock.

I paid the hefty tax bill.

I went on with my life.

I never felt better. Financially, that is.
Forgot to mention above -

The stock that I sold in 2004 declined over 90% by 2009.

I dodged a HUGE bullet.

It happened to me. It can happen to you.
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Re: Talk me into diversifying ... (high tax burden)

Post by Silverado »

RetiredAL wrote: Fri Jul 05, 2024 2:14 am
BirdFood wrote: Fri Jul 05, 2024 1:36 am I would take the tax hit now.
+1

If me, I'd sell 75-80% of it tomorrow.
It will feel painful in the moment to hit that sell button, but keep in mind the long term.

Congrats OP, don’t let it get away.
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Re: Talk me into diversifying ... (high tax burden)

Post by Wiggums »

Diversifying is what you need to do. You already know that.

My coworker held onto their company stock because they didn’t want to paying tax. The company stock fell to 98 cents. My other buddy put $9,000 down on AOL after changing jobs. He watched his money grow to 1.3M, but didn’t know where to reinvest the money so he did nothing. Sadly, he lost most of those paper gains.

Sometimes people have a “fear of missing out”, when in fact, they should have a “fear of losing it all”.
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Re: Talk me into diversifying ... (high tax burden)

Post by Outer Marker »

TomatoTomahto wrote: Fri Jul 05, 2024 7:16 am
Outer Marker wrote: Fri Jul 05, 2024 7:06 am What's the stock?

Berkshire Hathaway - Hold
Nvidia - sell
Haha, you sort of caught me in my immediately previous post, which I've edited. We have a share of BRK.A which has experienced a lot of gains and we are keeping for our heirs to benefit from the stepped-up basis. A major difference to OP's situtation, though, is that it's much less than 70% of our portfolio.

So, I guess I'd take the tax hit on at least half of the one stock.
Yeah, Uncle Warren has done well by me.

I (or rather my girls) will benefit from stepped up basis as well, but it's kind of a bizzare tax policy if you ask me. It encourages hoarding of wealth and increases wealth inequality. If I were king, you'd only get the benefit of your basis if you sold in your lifetime - and would pass to heirs with zero basis. Use the extra revenue to shore up social security and other things we need. Relatively painless - you won't miss it when you're gone.
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Re: Talk me into diversifying ... (high tax burden)

Post by TomatoTomahto »

Outer Marker wrote: Fri Jul 05, 2024 8:49 am
TomatoTomahto wrote: Fri Jul 05, 2024 7:16 am
Outer Marker wrote: Fri Jul 05, 2024 7:06 am What's the stock?

Berkshire Hathaway - Hold
Nvidia - sell
Haha, you sort of caught me in my immediately previous post, which I've edited. We have a share of BRK.A which has experienced a lot of gains and we are keeping for our heirs to benefit from the stepped-up basis. A major difference to OP's situtation, though, is that it's much less than 70% of our portfolio.

So, I guess I'd take the tax hit on at least half of the one stock.
Yeah, Uncle Warren has done well by me.

I (or rather my girls) will benefit from stepped up basis as well, but it's kind of a bizzare tax policy if you ask me. It encourages hoarding of wealth and increases wealth inequality. If I were king, you'd only get the benefit of your basis if you sold in your lifetime - and would pass to heirs with zero basis. Use the extra revenue to shore up social security and other things we need. Relatively painless - you won't miss it when you're gone.
I don’t disagree; so many tax laws foster behaviors that are not optimal for a nation. That’s as far as I think I’m allowed to say.
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nickoli
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Re: Talk me into diversifying ... (high tax burden)

Post by nickoli »

Lots of great replies here, thanks folks.
dogagility wrote: Fri Jul 05, 2024 5:28 am
nickoli wrote: Fri Jul 05, 2024 1:26 am What would you do?
- Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
Seems drastic. You said you're a high earner, so there would be missing income to include in the decision. Could you easily pick up where you left off?

What if the stock takes a 1.8MM hit during this time? Then you've quit your job for no monetary benefit.
- move to a low-tax state (save $500k)
Another seemingly drastic action... unless you already plan to move.
- Hold on and diversify when in a lower-income year later on
It's an option. Are you feeling lucky... holding this large position is essentially gambling with 3.6MM on the table.
- Just take the tax hit and diversify now
If you don't need this 3.6MM, then it doesn't matter what you do. If your lifestyle would be significantly impacted by having a large loss in this position, then I would sell immediately and diversify.
Missing out on income - yea, and I think it would indeed be difficult to return, or find a similar role which pays as much as I am currently. Would be awesome to take 1 or 2 years off right now, though :D :beer
Moving to lower income state - seems like at some point it's worth considering. For a family of 5, that's certainly a difficult decision, though, for sure. And not likely in my cards.
We don't necessarily _need_ it, but we'd certainly be much more comfortable with it than without it :D
Sandtrap wrote: Fri Jul 05, 2024 6:35 am
to op:

notes and questions:
Some bigger more comprehensive perspectives from your data, more data would help:

1
If you do nothing for 1 year and the individual stock value goes from 5.4 million to 6.4 million, would you have looked back and be glad you hung onto it?
2
What is it right now, financially or otherwise, that is the impetus to sell this stock?
Logic, spreadsheet, numbers, "gut feeling for right timing (sell now)?
3
You mention "hold on and diversify when in a lower income year later"...
And you mention moving to a lower tax state.....
so
What is happening now that predicts "moving" and "lower income"?
4
What will you do with the 3.6 million (net)?
Add to existing portfolio distributed to retain AA?
Buy a 50 unit apartment building for the tax (and tax shelter) and asset diversification benefits?
What?
5
How many years are you away from retirement?

j :D
1 - Well yes :) But probably less so vs the case of hanging on and watching it crash 50-60%. Which I've already lived thru a couple times, so I do indeed have a taste of how that feels. Not quite with this much money on the table, though, so it would likely sting a little harder.
2 - yes, yes, yes
3 - I'm in the middle of my prime earning years, so realistically, even if I decide I've made enough, had enough, and retire early - that's like 5, 10 years out for me.
4 - Redistribute to my AA. Though apartment building tax shelter sounds intriguing :wink: I doubt I've got the personal bandwidth to take on an investment like that.
5 - I'm in mid-30s, so, 20ish if I retire in mid-50s. Maybe, probably sooner? Maybe retire from corporate life sooner, but do something else.
Wiggums wrote: Fri Jul 05, 2024 7:47 am Diversifying is what you need to do. You already know that.

My coworker held onto their company stock because they didn’t want to paying tax. The company stock fell to 98 cents. My other buddy put $9,000 down on AOL after changing jobs. He watched his money grow to 1.3M, but didn’t know where to reinvest the money so he did nothing. Sadly, he lost most of those paper gains.

Sometimes people have a “fear of missing out”, when in fact, they should have a “fear of losing it all”.
You're totally right. Somehow we don't fear losing it until it's already lost. But we certainly feel a sense, or fear as you put it, of missing out on the next big upswing which keeps us from selling. Even when it seems more likely for the position to fall (or stagnate) vs reaching new highs.
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Re: Talk me into diversifying ... (high tax burden)

Post by avidlearner »

sell it as soon as you can. my company stock went down 80% and still hasn't recovered. For me I had unvested stock options so it was paper money and I couldn't sell. But you have real stocks so take the hit and sell ASAP. if its a company like MSFT or GOOGLE then sell 50% now and rest next year if you think it would go up.
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

nickoli wrote: Fri Jul 05, 2024 6:47 pm But we certainly feel a sense, or fear as you put it, of missing out on the next big upswing which keeps us from selling. Even when it seems more likely for the position to fall (or stagnate) vs reaching new highs.
It sounds like you’re not inclined to take the strong advice from Forum members to sharply reduce your stake in this single stock.

Maybe try this plan out -
—— Sell one half of the stock now. Take some money off the table.
—- Reinvest the proceeds in a broadly diversified, low cost portfolio.
—- Sell off half of the remaining shares next year, and reinvest.
—- Repeat the cycle every year until you work down the single stock position to (5%) of your investments.

This process won’t cause you to totally “miss out on the next big upswing”, as you put it. You’ll just profit a little less from the “big upswing”.

But you also won’t totally “fall off the swing” if the stock crashes.
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Re: Talk me into diversifying ... (high tax burden)

Post by grabiner »

nickoli wrote: Fri Jul 05, 2024 1:26 am - Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
This won't even work very well. If you are married, you pay NIIT on all capital gains which take your adjusted gross income over $250K, and 20% capital-gains tax on capital gains which take your taxable income over $583,750. Thus, even if you earned no other income, it would take nine years to unload the stock without paying 23.8% federal tax on any of it. (And if the stock market rises faster than inflation, it would take even longer, as the capital gains on the stock you continue to hold will increase.)

I do often recommend splitting a stock sale over two years to reduce taxes, but that won't make much difference for you;

One way to reduce the taxes would be to donate some of the stock to charity, and sell the rest. You can deduct charitable contributions up to 30% of your adjusted gross income, and that offsets ordinary income first. So, if you donate $1.2M of stock (most likely to a donor-advised fund, unless you want to take advantage of this windfall to make a single huge donation such as funding a scholarship), you could sell the rest for an adjusted gross income of $4M, and pay tax on $2.8M at the capital-gains rate.
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nickoli
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Re: Talk me into diversifying ... (high tax burden)

Post by nickoli »

Stinky wrote: Fri Jul 05, 2024 7:48 pm
nickoli wrote: Fri Jul 05, 2024 6:47 pm But we certainly feel a sense, or fear as you put it, of missing out on the next big upswing which keeps us from selling. Even when it seems more likely for the position to fall (or stagnate) vs reaching new highs.
It sounds like you’re not inclined to take the strong advice from Forum members to sharply reduce your stake in this single stock.
I was talking more in general terms. In this case it's more due to paying such high LTCG rate that's got me frozen. And thinking that I could somehow lower the tax rate. But I realize now that I should just sell and take the tax hit.
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Re: Talk me into diversifying ... (high tax burden)

Post by TomatoTomahto »

nickoli wrote: Sat Jul 06, 2024 9:48 am
I was talking more in general terms. In this case it's more due to paying such high LTCG rate that's got me frozen. And thinking that I could somehow lower the tax rate. But I realize now that I should just sell and take the tax hit.
Yeah, but consider yourself lucky that it’s LTCG rather than income. We feel this annually, as my wife’s outsized RSUs vest. But, we try to look on the bright side: focusing on what’s left after taxes rather than what gets paid in taxes. The majority of the world would gladly trade places.
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Re: Talk me into diversifying ... (high tax burden)

Post by bradpevans »

While stocks can “open” at a price substantially lower than they “close”, you could put into stop loss orders to eliminate / lessen the downside risk

If leaving an inheritance is in the cards you may wish to keep some shares ..
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Re: Talk me into diversifying ... (high tax burden)

Post by RetiredAL »

TomatoTomahto wrote: Sat Jul 06, 2024 10:13 am ..... focusing on what’s left after taxes rather than what gets paid in taxes ......
+10
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Re: Talk me into diversifying ... (high tax burden)

Post by grkmec »

What’s the stock? My answer depends on the actual stock.
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Re: Talk me into diversifying ... (high tax burden)

Post by doobiedoo »

grkmec wrote: Sat Jul 06, 2024 4:46 pm What’s the stock? My answer depends on the actual stock.
doobiedoo wrote: Fri Jul 05, 2024 2:21 am For me, it would depend on the stock.
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Re: Talk me into diversifying ... (high tax burden)

Post by Watty »

I did not try to crunch the numbers but I suspect your calculations are way off and you need to do dummy tax returns and spreadsheets to figure out the actual taxes because;

1) The best case scenario would likely be that you move to a different state and somehow manage to only pay about 20% federal long term capital gains tax when you eventually sell it.

2) I am pretty sure that you can deduct your state income tax on your federal tax return.

3) The numbers are rough but if you sell the stock and clear $3.6 million then while I would not recommend it you could put that into 1 year 5% CDs and get a safe $180K in interest(before taxes) which would partially offset the capital gains taxes you would pay.
nickoli wrote: Fri Jul 05, 2024 1:26 am Here's my situation. I've been blessed to have built up a substantial position in an individual stock currently worth $5.4M, with a cost basis of about $150k. The rest of my portfolio is mostly total market index + some bonds ($2.2M). So this individual stock represents 70% of my portfolio.
.....
If I liquidated the entire position today, I'd owe $1.8M in taxes, being left with $3.6M. (woe is me, right?)

You are missing a couple of important things;

1) Your index funds likely also own a significant portion of this companies stock so you likely have even more exposure to it.

2) If you work for this company and have RSUs your future wages and RSUs give you even more exposure to this company. Even if you are doing a great job I have seen people unexpectedly be laid off when a project was cancelled or a regorinization happened which resulted in their position being eliminated.

3) They are usually not great deal because of the cost but you may be able to use options(the type you purchase) to help you minimize your regrets in case the stock soars right after you sell it. if you work for that company their may be restrictions on you buying options on that companies stock.

4) Putting the stock in a donor advised fund or gifting it to people like your adult kids may be allow you to reduce the tax burden some.

5) If you hold on to the stock for a few years then there is a non-zero chance that the tax laws could change and your tax rates could be higher then.
nickoli wrote: Fri Jul 05, 2024 1:26 am What would you do?
I would sell most of it Monday morning. There is a lot going on in the country and the world right now which could cause sudden dips in the stock market which would be especially risky when you own a lot of one stock which has had a huge runup.
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Re: Talk me into diversifying ... (high tax burden)

Post by PowderDay9 »

Sell it all now. If you can't get yourself to do that, then implement Stinky's plan of selling 50% per year.
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Re: Talk me into diversifying ... (high tax burden)

Post by Paullmas »

avidlearner wrote: Fri Jul 05, 2024 7:39 pm sell it as soon as you can. my company stock went down 80% and still hasn't recovered. For me I had unvested stock options so it was paper money and I couldn't sell. But you have real stocks so take the hit and sell ASAP. if its a company like MSFT or GOOGLE then sell 50% now and rest next year if you think it would go up.
What about putting in a trailing stop loss order?
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Re: Talk me into diversifying ... (high tax burden)

Post by BrooklynInvest »

I worked at Citigroup for a few years in the early 2000s. I wasn't a high earner but my company stock losses were enough to delay a renovation on my kitchen. Woe is me. For some friends that had been there a long time their losses were substantial enough to delay retirement - significantly. Although in Citi's case, massive stock losses were also accompanied by layoffs.

I think the answer partially depends on needs - if your diversified portfolio will be enough for a good retirement and the company stock was play money then that would make me reduce it less.

And the other part is the stock itself. If we're talking a large, stable company I'd perhaps reduce my exposure to what I could tolerate if it dropped 50% (Citigroup's losses were far worse than that). A more start-up like firm and I'd be cutting further.

In all cases I'd want to bank the win and pay taxes on a good half of that substantial gain. I'm fairly tolerant of equity risk, but not THAT tolerant.

There is of course another, um, option - buying puts (or establishing a collar). It's an expense and it's very un-boglehead - and not something I'd DIY. I'd talk to an options specialist, but depending on the cost and the strike price it could help you?

Good luck OP - and well done!
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

doobiedoo wrote: Sun Jul 07, 2024 1:06 am
grkmec wrote: Sat Jul 06, 2024 4:46 pm What’s the stock? My answer depends on the actual stock.
doobiedoo wrote: Fri Jul 05, 2024 2:21 am For me, it would depend on the stock.
Can you give us example(s) of stocks you would hold onto after a 3500% rise?
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grabiner
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Re: Talk me into diversifying ... (high tax burden)

Post by grabiner »

BrooklynInvest wrote: Sun Jul 07, 2024 7:30 am There is of course another, um, option - buying puts (or establishing a collar). It's an expense and it's very un-boglehead - and not something I'd DIY. I'd talk to an options specialist, but depending on the cost and the strike price it could help you?
Option investing is usually a fair trade-off between risk and return. However, it can make sense if your personal return is not the same as the market return.

If your stock is currently worth $100 and you buy a put at $80, you can't lose more than 20% of the value until the put expires; however, your return will be reduced by the value of the put.

But when that put expires, you will either have to sell or buy a new put. If the stock happens to be at $80, buying a new put at $80 will be much more expensive, and if you buy your new put at $64 instead to prevent a 20% loss below the new price, you risk a cumulative loss of 36%. Now repeat this for even longer periods and you are giving up a large amount in returns in order to protect against losses.

If you have a reason to postpone the sale for a short time, this does make sense. For example, if you are planning to move to a no-tax state in two years, you can save a large amount in state taxes if you wait those two years to sell. Buying a two-year put, or two one-year puts, can protect your gains until that time.

The idea of a collar is to avoid the loss on the put by giving up the stock upside instead. If you buy a put at $80 and write a call at $120, you can't gain or lose more than 20%. But since this combination has turned the stock into something with a small range of volatility, the return will be more like that of a short-term bond. And, as above, if you repeat the collar for several years and the stock falls, you either lose money on your later collars or take losses by setting the strike prices lower.
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Stinky
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

For those of you who have commented on this thread -

There’s another new thread of a person who has a sizable concentrated position. Plus some questions about housing and children education.

I expect that he/she would appreciate your comments.

viewtopic.php?t=435094
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nickoli
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Re: Talk me into diversifying ... (high tax burden)

Post by nickoli »

grabiner wrote: Sun Jul 07, 2024 8:35 am
BrooklynInvest wrote: Sun Jul 07, 2024 7:30 am There is of course another, um, option - buying puts (or establishing a collar). It's an expense and it's very un-boglehead - and not something I'd DIY. I'd talk to an options specialist, but depending on the cost and the strike price it could help you?
Option investing is usually a fair trade-off between risk and return. However, it can make sense if your personal return is not the same as the market return.

If your stock is currently worth $100 and you buy a put at $80, you can't lose more than 20% of the value until the put expires; however, your return will be reduced by the value of the put.
Thanks for the detail here, buying options as insurance against a price drop does sound appealing, especially if we were serious about moving out of state within a year or two. I posed the question to my SO and nope not likely gonna happen :) At this point we've got kids and friends here, would have to be a huge windfall to make it move the needle enough for us to move.

Also this position is indeed company stock. I'd have to double check to confirm but I believe I'm unable to trade in derivatives associated with our stock.
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Re: Talk me into diversifying ... (high tax burden)

Post by grabiner »

nickoli wrote: Sun Jul 07, 2024 2:14 pm Also this position is indeed company stock. I'd have to double check to confirm but I believe I'm unable to trade in derivatives associated with our stock.
This is probably correct. If you are still employed, buying put options against the company stock creates a conflict of interest and is likely to be forbidden by corporate policy. Options could be used to protect a position from a former employer, or a stock you bought before it unexpectedly boomed.

But this also increases the risk of holding a large amount of your portfolio; if your company gets into trouble, the stock will crash and you may become unemployed at the same time.

If you won't leave the state, you really only own 2/3 of the value of the stock; whenever you sell it, you will have to pay 1/3 of the value to the IRS and state. If you sell, you are converting that 2/3 value into something much less risky.
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Re: Talk me into diversifying ... (high tax burden)

Post by FoolMeOnce »

nickoli wrote: Fri Jul 05, 2024 1:26 am - Take a year off to lower your income to 15% or possibly 0% LTCG brackets + avoid NIIT (save $250k-1.3M)
That's not how it works. Most of your gains will be taxed even with zero other income. See grabiner's post above and see here:
https://www.fiphysician.com/capital-gai ... 0in%20Blue.
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Re: Talk me into diversifying ... (high tax burden)

Post by TomatoTomahto »

nickoli wrote: Sun Jul 07, 2024 2:14 pm I posed the question to my SO and nope not likely gonna happen :) At this point we've got kids and friends here, would have to be a huge windfall to make it move the needle enough for us to move.

Also this position is indeed company stock. I'd have to double check to confirm but I believe I'm unable to trade in derivatives associated with our stock.
Yeah. New Hampshire is not that far from Massachusetts, and our tax situation would be very different in NH. But, we like it where we are and the good news is that we don’t need to move for tax savings.

I wanted to add that, even if it’s legal to place puts on your company stock, it’s a horrible optic.
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Re: Talk me into diversifying ... (high tax burden)

Post by nickoli »

Sold $500k this morning.

Baby steps... :D
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Re: Talk me into diversifying ... (high tax burden)

Post by Stinky »

nickoli wrote: Mon Jul 08, 2024 11:39 am Sold $500k this morning.

Baby steps... :D
Excellent!

The first 10% is the hardest……
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Re: Talk me into diversifying ... (high tax burden)

Post by Florida Orange »

I was in a similar situation. I took the tax hit. It wasn't fun but now I'm glad I did it. My thinking was that there's a good chance I'll end up paying most of that tax eventually anyway and it's the price I pay for eliminating all that risk. Nobody likes paying taxes, but don't let short term pain blind you to the reality of your long term best interests.
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Re: Talk me into diversifying ... (high tax burden)

Post by calvin111 »

Hi OP, Congrats on massive gain. You can also do charitable donations of your appreciated stocks (if you are charitable inclined).

Given your income, you will already be in very high tax bracket - 35-37% fed, 9-10% state + if you sell stocks then you will also pay 20% fed capital gain +9-10% state + 3.8% NIIT. So almost 33% on capital gains.

But if you donate your shares to charity, then you will not pay the 33% capital gains tax + you will get deductions on your income, you will not pay 44% in tax.

so you might be able to save 77% in taxes by donating. So if you donate 100k, then you will actually donate 23k of net cash from your pocket, but will be able to donate full 100k to charity. And if you are able to get company matching for donation then you can get further benefit.

So maybe it is time to thank God for your good fortune and do something better for the world.

The other strategy is to open CRUT and defer taxes to future years. But it is little involved and I am also exploring something similar, but have not done yet. I have started donating to charity from my gains.
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