Investing 102

[GregWeld]

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]

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.

[pw2006]

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]

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.

[pw2006]

Originally Posted by GregWeld

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.

Great points Greg, taxes totally depend each person's set of circumstances.

[GregWeld]

Originally Posted by pw2006

Great points Greg, taxes totally depend each person's set of circumstances.

Yep -- and that's why I said earlier that we really don't want to turn this into a tax discussion -- only in the BROADEST of terms etc and give people enough info to at the very least KNOW THEY SHOULD ASK - because TAXES are a real trap we can all fall into. There's just too damn many circumstances.

A retiree on SS might be able to sell enough gains to supplement their SS and not have any tax due...

And I get the root of the question.... and it's a good one. But the answer "depends".

I will answer honestly for my own personal situation -- I don't give any thought to what the tax consequences are for a trade. I just do what's best for making (or not loosing) money. The taxes are what they are. I just can't clutter my head with all the rules etc in order to save $500... and then lose $2000 because I didn't want to pay taxes. But that's my personal "method". I pay way more taxes than I need to - my tax guy yells at me - and I tell him "sorry dude... I just don't care.... I made money didn't I?" and he always concedes that in fact "yes I did"... And to me - that's the bottom line. But that's not good advice for others... because it CAN AND DOES make a difference!

[CRCRFT78]

This thread is making me realize there is ALOT more to this than just buying and selling. Now comes into play the questions about taxes and being taxed. I recently dumped a stock and two mutual funds I wasn't happy with in favor of purchasing some other stocks. Because this is a rollover IRA account (not sure if that affects anything tax wise) should I be worried about the taxes now or does that come into play when deductions begin to come out at retirement?

[CRCRFT78]

I also have a brokerage account with Schwab that I'd like to start using to help supplement my retirement accounts. Do you suggest getting started with that in the same manner? Pick some names we know, study the charts and buy some stocks? Or should I sit down with my tax guy before getting started with that to discuss everything?

[GregWeld]

Originally Posted by CRCRFT78

This thread is making me realize there is ALOT more to this than just buying and selling. Now comes into play the questions about taxes and being taxed. I recently dumped a stock and two mutual funds I wasn't happy with in favor of purchasing some other stocks. Because this is a rollover IRA account (not sure if that affects anything tax wise) should I be worried about the taxes now or does that come into play when deductions begin to come out at retirement?

IRA/401 are TAX DEFERRED ACCOUNTS -- no taxes due UNTIL you retire and start the withdrawals. The PREMISE is that you would then be a far lower tax brackets and that your withdrawals are controlled to minimize taxes etc. So if you made the transactions inside these types of accounts -- then you don't need to worry - there is no taxable action NOW.

If the transactions are within a ROTH IRA - there is NEVER any tax due - because that was after tax funds. You pay no further taxes even upon withdrawal. They're WONDERFUL but are very limited with their own "maximum funding per year" rules and they have limits as to WHO (by income) can fund them.

[GregWeld]

Originally Posted by CRCRFT78

I also have a brokerage account with Schwab that I'd like to start using to help supplement my retirement accounts. Do you suggest getting started with that in the same manner? Pick some names we know, study the charts and buy some stocks? Or should I sit down with my tax guy before getting started with that to discuss everything?

Any account that is OUTSIDE of a "tax deferred" type retirement account - is going to be subject to tax accounting. So depending on your trading - your amount of dividends received - whether or not those dividends are "qualified" etc. Your income at the time. Whehter or not you OFFSET the gains with sales of loses etc (which is what people do at year end -- they take gains and offset those gains with taking a loss thus rebalancing their accounts if they need to etc).

If you're not going to TRADE -- so you're not in and out of stuff all the time - You buy and hold for that magic ONE YEAR AND A DAY - which makes the trade Long Term Capital Gain.... taxed currently at 15% -- and the QUALIFIED dividends are currently taxed at maximum 15%... OR you don't do anything - you just let the stuff grow -- then you're only taxed on the dividends received . You have to make a lot of dividend income to really incur much tax due. 15% is pretty dang small amount - and you should be happy as a clam if you're picking up 10 grand a year in dividends and only owe 1500!