tax selling or not?

Although tax rates may go up next year, if I move to a low tax state, minimizing capital gains this year makes sense for me.

The buy and hold approach saves on taxes on the average.

The wash sale rules are overly strict making it difficult to change strategies such as selling the stock to buy calls.

I usually wait until a stock becomes overvalued before I sell.

I am doing a partial Roth conversion this year because I don't want to deal with the uncertainties of the market to do the 3 year tax spread out of the gain.

-- Ron

Or it accumulates to form a timebomb of tax liability. At the federal level they seem to be considering frightening new taxes a few years out, and maybe municipalities will have to also. I like to bleed off tax liabilities or else I don't dare sell until well after an investment sours.

On the other hand I guess by selling early you lose compounding of that money slated for taxes. And you had a good point where selling later could occur in a region with lower local taxes. Thanks, I think I will go-slow on this tax selling.

Strategy comment: consider using periods of high volatility, rather than the calendar, as your triggers for looking at tax-loss selling. It's more feasible if you invest using ETFs/mutual funds rather than individual securities, because of the wash sale issue that you mentioned. Over the past several years it's been possible to accumulate very large realized losses in this manner. The resulting carry-forwards, which never expire (until death), really add flexibility in your investing. Even if your focus is individual stocks, you might consider having an ETF portfolio alongside them just for the purpose of generating tax-accounting losses. And for diversification against a run of bad picks, of course!

While drops can happen for a lot of reasons, including negative reactions to tax legislation, I don't think changes in the capital gains rate in particular are likely to trigger significant stock market drops. Consider the number of investors that are not taxable (pension funds, qualified plans, sovereigns). When the QDI rate was passed, dividend stocks didn't noticeably rise in price beyond what the market did, perhaps for this reason. Other factors end up being more significant in setting pricing.

On tax-loss selling w/stocks, it's informative to do up a spreadsheet to see how much change in stock price would wipe out the tax benefit you expect from realizing the loss. E.g. if a stock gains 5% or 10% while waiting out your wash-sale period, does it wipe out your tax advantage? What's the break-even %, and how does that compare to the implied volatility (if the stock has actively-traded options)? In general, I find that the most obvious sale candidates are only those with large losses. A stock only say 10% underwater is too likely to random-walk beyond that break-even price to justify giving up the holding and holding period.

-Tad

What do you mean?

Brian

Taking a loss on a stock and buying calls to later acquire the stock is considered a wash sale.

-- Ron

So even backed by existing stock? I didn't know that. Obviously, buying new stock to cover the call would be a wash.

Brian

Yes, if you buy the calls less than a month before you sell your stock, it is still considered a wash sale.

-- Ron

Will Trice in the above thread came up with an elegant equation which I believe may help you get a handle on numbers involved in your question. You may want to read the whole thread from the beginning.

So I take it the cuts stay on for a couple years, although that's one year short for those who converted a Roth this year to be taxed on both 2012/2013.

A key c> So I take it the cuts stay on for a couple years, although that's one

I guess I mixed up the tax years with the year of tax filings. Therefore, I think (?) the proposed extension lines up just right for the split Roth conversion payment years. Not that this tax rate will be affected, but you may be pushed to higher point on it by lumping in realized gains in those years.

One of my rules is if there are two equally logical paths, I do half of each. That way I wont obsess with making a totally wrong decision, just a half-wrong decision. I stole this from Orman's Power of Money.