Investing 102 - Lateral-g Forums

billscamaros · #1 01-02-2012, 05:48 AM

A question regarding capital gains ........

In your example of the stock that made huge gains, and now you want to rebalance your portfolio. Let's assume that you've owned this stock a few years. You sell off some shares off and buy shares in a different stock. So you have fees for the buying and selling. But do you pay capital gains now on the money that you made, or do you not have any gains since you have reinvested those dollars?

**GregWeld** · #2 01-02-2012, 07:38 AM

Quote:

Originally Posted by billscamaros

A question regarding capital gains ........

In your example of the stock that made huge gains, and now you want to rebalance your portfolio. Let's assume that you've owned this stock a few years. You sell off some shares off and buy shares in a different stock. So you have fees for the buying and selling. But do you pay capital gains now on the money that you made, or do you not have any gains since you have reinvested those dollars?

Excellent question -- with multiple answers - and my answer is going to give you just enough info so that you'll know that you should contact your tax pro BEFORE you sell!

There are three different ways to make a trade for accounting purposes and these ways must be selected at the time of the trade BEFORE the trade is "settled" (check with your brokerage for this info).

FIFO -- First In - First Out

LIFO -- Last In - First Out

Specified Lot

These "methods" can be used PER TRADE - and obviously affect your gain or loss. Because if you've bought shares over time - they're at different costs, thus have different gains/losses.

What I can't answer for you - is - say you bought 10 shares at $100 ($1000) and it's now worth $3000 -- and you just want to take your original $1000 out and leave the "Gain" ------- and that is what I think you're asking...... and I have to tell you I honestly do not know the answer.

**GregWeld** · #3 01-02-2012, 07:46 AM

Bill -- I wanted to SEPARATE the answer to your question because this is so complicated.

There is another selection of "method" that is selectable in my Schwab account but I didn't research to see if it's available (selectable) in my other brokerage accounts.... I've on "vacation" and just didn't want to take the time...

But Schwab has a "Tax Lot Optimizer" selection where the sales are selected via various conditions to MINIMIZE the tax consequences. LEGALLY of course... so they'd sell the least gains first and so on until the sold the number of shares you wanted to sell.

BUT I CAN'T EMPHASIZE ENOUGH - this is an IRS / TAX PREPARER question don't listen to what some bozo like me tells you on a forum.

billscamaros · #4 01-02-2012, 12:51 PM

Quote:

Originally Posted by GregWeld

What I can't answer for you - is - say you bought 10 shares at $100 ($1000) and it's now worth $3000 -- and you just want to take your original $1000 out and leave the "Gain" ------- and that is what I think you're asking...... and I have to tell you I honestly do not know the answer.

Not quite. So I still have 10 shares that are now worth $300/share. I want to leave the original $1000 in place and move the $2000 in "gain" to some other stock because I want to rebalance my portfolio. So I sell $2000 of the stock and buy $2000 of stock in some other company ... all within my brokerage account .... I don't receive any of this in actual cash payout. (And let's assume that it's a straightforward brokerage account .... not a regular or Roth IRA account. So I already paid tax on the original $1000.)

Let's assume that I had that original stock for a couple of years, so that $2000 gain is a long term capital gain - correct? And I immediately re-invested the gain into another stock. I guess that my question is: given this scenerio, when do I pay tax on my capital gains .... in the tax year that I make the capital gains, or when I actually take the payout from the account?

**GregWeld** · #5 01-02-2012, 07:05 PM

Quote:

Originally Posted by billscamaros

Not quite. So I still have 10 shares that are now worth $300/share. I want to leave the original $1000 in place and move the $2000 in "gain" to some other stock because I want to rebalance my portfolio. So I sell $2000 of the stock and buy $2000 of stock in some other company ... all within my brokerage account .... I don't receive any of this in actual cash payout. (And let's assume that it's a straightforward brokerage account .... not a regular or Roth IRA account. So I already paid tax on the original $1000.)

Let's assume that I had that original stock for a couple of years, so that $2000 gain is a long term capital gain - correct? And I immediately re-invested the gain into another stock. I guess that my question is: given this scenerio, when do I pay tax on my capital gains .... in the tax year that I make the capital gains, or when I actually take the payout from the account?

When you'd take the action to SELL the stock - that very instant if you have a gain - you've got a taxable event. So let's say you'd bought stock in 2009 and sold some for a gain in 2012 -- you'd have a taxable event in 2012 to report (provided it's in s normal account for this discussion). Doesn't make any difference that you rolled it into another stock - you took the gain. That help??

billscamaros · #6 01-03-2012, 03:32 AM

Quote:

Originally Posted by GregWeld

When you'd take the action to SELL the stock - that very instant if you have a gain - you've got a taxable event. So let's say you'd bought stock in 2009 and sold some for a gain in 2012 -- you'd have a taxable event in 2012 to report (provided it's in s normal account for this discussion). Doesn't make any difference that you rolled it into another stock - you took the gain. That help??

Yes ... that answers the question! Thanks again for your insight and your willingness to share it!

68 stang · #7 01-03-2012, 04:18 AM

Yes Greg that all makes sense to me. I just have 2 more questions.

What to do when the FED raises the interest rate?

Would you sell your shares in a company if the management team starts to leave the company, and it has been a proven performer?

**GregWeld** · #8 01-03-2012, 07:05 AM

Quote:

Originally Posted by 68 stang

Yes Greg that all makes sense to me. I just have 2 more questions.

What to do when the FED raises the interest rate?

Would you sell your shares in a company if the management team starts to leave the company, and it has been a proven performer?

I'll do NOTHING once the FED starts to raise interest rates... because that would mean that the economy is IMPROVING so stocks will get a nice boost from that (MY GUESS ONLY SINCE WE DON'T KNOW). But maybe by the time the FED gets back to 2 or 3% -- I might start thinking about thinning (raising cash) so I can be ready to buy more bonds. BUT Remember that for most of you - you're on the 20 - 30 - 40 year plan... and steady and not moving around is what is going to work best for you.

If the economy is good - then you're stocks should provide you with growth and that nice dividend. Compounding that dividend is - over time - what works.

What most people do is buy at the top - and sell at the bottom - and then buy something else at the top and sell low etc. You really can't "time" the market or when it's going move - you'll always be behind the curve. SO for 99.9% of investors (including me) they're better off just staying where they are and putting NEW MONEY into the alternative (Bonds/CD's etc).

++++++++++++++

If the news is bad on a company - and the board is firing the heads etc because of it - I'd bail.... Otherwise you're gambling that the "new guys" can right the ship. I'd rather be in shares that don't have that issue.

pw2006 · #9 01-02-2012, 08:22 AM

Quote:

Originally Posted by billscamaros

A question regarding capital gains ........

In your example of the stock that made huge gains, and now you want to rebalance your portfolio. Let's assume that you've owned this stock a few years. You sell off some shares off and buy shares in a different stock. So you have fees for the buying and selling. But do you pay capital gains now on the money that you made, or do you not have any gains since you have reinvested those dollars?

Hey billscamaros- You would pay taxes on the gains in the year they were incurred, the tax basis does not roll into your new stock purchase.

**GregWeld** · #10 01-02-2012, 08:41 AM

Quote:

Originally Posted by pw2006

Hey billscamaros- You would pay taxes on the gains in the year they were incurred, the tax basis does not roll into your new stock purchase.

Don't take this post personally -- I just wanted to respond because there are so many people reading this stuff... and we don't want to give some info that might be right for some and wrong for others...

Really - that's not enough information - because we don't know if he's asking about an IRA - a ROTH - or just a regular account.... We don't even know if there are LTCG taxes due because his income might not be high enough to pay ANY... there are ZERO LTCG taxes for some folks... and for some of us there is the AMT and all manor of other mitigating circumstances. That's why I didn't want to give him some "pat" answer. Because it "depends". Maybe all his gain is from reinvested dividends that he's already paid taxes on?

That's why I said his questions can really only be answered by HIS tax pro...

I think questions like this are GREAT because they give people information they should at least think about etc -- but can't be answered in a forum. And they're just as critical as the timing on an engine - which we know there is no pat answer because it depends on the cam - the gears - the use - and blah blah blah... What you really need to know is that it's critical to find out BEFORE you act - so you can form a PLAN.... and act accordingly.

By the way folks -- note that when I say LTCG are ONE YEAR AND A DAY -- that "DAY" is critical because the IRS rule is "longer than one year" -- which doesn't mean ONE YEAR -- it's LONGER THAN ONE YEAR. Thus I always add that "one year and a DAY". The devil is always in the details.