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tax selling or not?

We approach the traditional time of year for deciding whether to realize capital gains/losses or not, partly based on tax implications. This year may be potentially crucial because we could face tax rate hikes in next year or three, and also the Roth conversion folks have a one time option to defer and split a possibly huge conversion tax. Random thoughts:
It would be nice to sit back and see whether the Dems concede that Bush tax cuts on cap gains and dividends should stay to promote job growth, or whether they stick to their class-warfare stance. But I think as that becomes decided, you may be fighting the market. If Bush tax rates expire, there may be a massive selloff giving you few gains to realize. Actually there may be quite a selloff anyway, which I don't understand because a smart investor doesn't liquidate then sit around but makes a switch to another stock (not back to same one due to wash-sale rules).
So I am guessing maybe now is the time to realize gains and switch to slightly different but better stocks. Some say that you should ignore past performance and only sell things that look to have a bad future, but I think there is wisdom in the gut tendency to lock in the bigger gains because everything goes in cycles and your winners may be near topping for a while.
The dreaded wash sale has been my curse, preventing me from tidying up things even when I am not trying to realize gains. But there is so much choice now that it is normally easy to find a similar but better idea to switch into. I have one favorite big gainer though, and am considering switching out of it, then back into it in an IRA. Of course the IRA has no free money for that, but I turn it into a giant musical chair game which is fun and forces you to rethink stale decisions.
If a roth conversion is to be paid off this tax year, then maybe you want to harvest losses although I guess conversion taxes can't directly be set against capital stuff. Anyway some have to consider capital carryovers from last year which may be negative and could benefit from... (gets too complicated to enumerate, unless someone has a particular interest?)
Reply to
dumbstruck
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
Reply to
Ron Peterson
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.
Reply to
dumbstruck
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
Reply to
Tad Borek

What do you mean?
Brian
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Reply to
Default User

So even backed by existing stock? I didn't know that. Obviously, buying new stock to cover the call would be a wash.
Brian
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Day 667 of the "no grouchy usenet posts" project.
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Reply to
Default User
Yes, if you buy the calls less than a month before you sell your stock, it is still considered a wash sale.
-- Ron
Reply to
Ron Peterson
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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.
Reply to
dapperdobbs
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.
Reply to
dumbstruck
A key concept in that thread was not realizing gains early lets you compound gains for later (even into more adverse rates). By that principle, I guess delaying Roth conversion taxes into the next couple years carries similar benefits.
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.
Reply to
dumbstruck
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.
Reply to
rick++

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