Tax discussion, strategies and questions

[clp1]

Job ending after 22 years do to Covid next month. Getting a severance package and paid for unused vacation time that could extend after the 39 week unemployment ends out to maybe almost another year. Already have 96 shares of TSLA at 400% gain. Its outperforming my 401k by miles. Completely debt free except for $2,000 on house and $1,800 for a OneWheel.
Would I be crazy to pull $100,000 out under the Cares Act to invest in TSLA. I know about the tax hit, but I miss out on the 10% penalty do to Covid and I pay tax on the rest over the next 3 years.
My thinking is it'll grow faster than my 401k, plus I have money in case *sugar* gets worse. I'd have upwards of 700+ shares of stock to fall back on.
I could start an IRA and max it the first year. Next year taxes would be less if I stay unemployed all year and milk the severance and vacation time money all I can.
Thoughts? Crazy things going thru my mind right now. 2020 just got about as bad as it can get for me now.

 

[JRD1]

Job ending after 22 years do to Covid next month. Getting a severance package and paid for unused vacation time that could extend after the 39 week unemployment ends out to maybe almost another year. Already have 96 shares of TSLA at 400% gain. Its outperforming my 401k by miles. Completely debt free except for $2,000 on house and $1,800 for a OneWheel.
Would I be crazy to pull $100,000 out under the Cares Act to invest in TSLA. I know about the tax hit, but I miss out on the 10% penalty do to Covid and I pay tax on the rest over the next 3 years.
My thinking is it'll grow faster than my 401k, plus I have money in case *sugar* gets worse. I'd have upwards of 700+ shares of stock to fall back on.
I could start an IRA and max it the first year. Next year taxes would be less if I stay unemployed all year and milk the severance and vacation time money all I can.
Thoughts? Crazy things going thru my mind right now. 2020 just got about as bad as it can get for me now.

Why do you want to withdraw from your 401k? If For living expenses, maybe ok. If it’s because your 401k doesn’t allow you to directly buy TSLA, most of the time after separation you can roll it over to an IRA at a brokerage that allows it.

 

[Mo City]

Job ending after 22 years do to Covid next month. Getting a severance package and paid for unused vacation time that could extend after the 39 week unemployment ends out to maybe almost another year. Already have 96 shares of TSLA at 400% gain. Its outperforming my 401k by miles. Completely debt free except for $2,000 on house and $1,800 for a OneWheel.
Would I be crazy to pull $100,000 out under the Cares Act to invest in TSLA. I know about the tax hit, but I miss out on the 10% penalty do to Covid and I pay tax on the rest over the next 3 years.
My thinking is it'll grow faster than my 401k, plus I have money in case *sugar* gets worse. I'd have upwards of 700+ shares of stock to fall back on.
I could start an IRA and max it the first year. Next year taxes would be less if I stay unemployed all year and milk the severance and vacation time money all I can.
Thoughts? Crazy things going thru my mind right now. 2020 just got about as bad as it can get for me now.

Forget the CARES Act. Why not roll your 401k over to an IRA?

 

[AMN]

Well, I'm trying to use my magical powers to move the SP higher. I sold another 10 covered calls for Jan 2022, 3500 SP for $290,000 to pad my savings account further. That should help the SP get to 4,000 in 15 months so I feel stupid for selling covered calls as I watch my shares get called away. You're welcome....

So, you capped your upside at 84% above today's price and you got paid 15% pre-tax on that risk for a year and a half. Your risk yields about 5% post-tax if you annualize it.
While I am sure seeing 300k hitting your checking account is nice, premiums on LEAPs are taxed as short-term income - 50% for you, I presume. So, unless you can offset short-term losses, I am not sure 150k post-tax is worth it given the current sentiment around the stock and upcoming events.

I'd close those calls. Advise.

 

[clp1]

Why do you want to withdraw from your 401k? If For living expenses, maybe ok. If it’s because your 401k doesn’t allow you to directly buy TSLA, most of the time after separation you can roll it over to an IRA at a brokerage that allows it.

Yes for living expenses and to get into TSLA before the next explosion in stock price. Probably make sense to roll into an IRA and forgo the tax hit, but having the extra money to withdraw anytime rather than wait 5 years and pay a penalty from the IRA looks good also.
I'm 49 also.

 

[BornToFly]

So, you capped your upside at 84% above today's price and you got paid 15% pre-tax on that risk for a year and a half. Your risk yields about 5% post-tax if you annualize it.
While I am sure seeing 300k hitting your checking account is nice, premiums on LEAPs are taxed as short-term income - 50% for you, I presume. So, unless you can offset short-term losses, I am not sure 150k post-tax is worth it given the current sentiment around the stock and upcoming events.

I'd close those calls. Advise.

Are you sure about LEAPS being taxed as short-term income if you hold more than a year? I think you are wrong.

I found this on Investopedia: When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP is taxed at the long-term capital gain rate if they held the contract for at least a year and a day. If they held the contract for a shorter period, they would be subject to short-term capital gains rates.

So far I have sold 10 Jan 22 Puts with 1,000 SP, and 20 CC with 3500SP, for almost 800k. After long term capital gain taxes which won't be due until 2022, this provides me with $576,000 to live off of for the next 15 months without having to sell any of my shares right now at 1800. I don't mind buying 1000 shares in 2022 at 1,000, or selling 2,000 or my shares for $7Million if I have to. Selling these contracts allows me to retire while I wait for the SP to increase on the rest of my shares.

 

[sdtslafan]

Are you sure about LEAPS being taxed as short-term income if you hold more than a year? I think you are wrong.

I found this on Investopedia: When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP is taxed at the long-term capital gain rate if they held the contract for at least a year and a day. If they held the contract for a shorter period, they would be subject to short-term capital gains rates.

 

[BornToFly]

View attachment 578066

That refers to LEAPS short. It is in direct conflict with what I found on selling LEAPS, so I'm assuming there is a difference there?

If a LEAP option is purchased and held for more than 12 months, is the tax treatment long term?

 

[sdtslafan]

So, you capped your upside at 84% above today's price and you got paid 15% pre-tax on that risk for a year and a half. Your risk yields about 5% post-tax if you annualize it.
While I am sure seeing 300k hitting your checking account is nice, premiums on LEAPs are taxed as short-term income - 50% for you, I presume. So, unless you can offset short-term losses, I am not sure 150k post-tax is worth it given the current sentiment around the stock and upcoming events.

I'd close those calls. Advise.

The article I referenced above seems to indicate they will be taxed short term even if sold short in account longer than a year.

But he is planning on retiring so his income in 2022 could be much less. I’m getting about 23% effective combined tax rate in Utah if 290k is his only income. Not advice. Please check with tax professional.

 

[MP3Mike]

That refers to LEAPS short. It is in direct conflict with what I found on selling LEAPS, so I'm assuming there is a difference there?

If a LEAP option is purchased and held for more than 12 months, is the tax treatment long term?

Short Sell LEAPS and Taxes

Short LEAPS Options
If you sell an options contract, including the LEAPS variety, the position is classified as being short. You received money for the contract and have an obligation to fill if the buyer chooses to exercise the option. With a sold LEAPS call, you must deliver stock if it is exercised, and with a sold put, you are obligated to buy shares. The option includes an exercise price that dictates the value if exercised and also whether or not it makes sense for the buyer to exercise his right to exercise.

You can also get "screwed" if one of your CC buyers exercises early. (Which I have some I am planning to do that on because I don't want to recognize the gain and pay taxes on it, and I want to start the long term clock on the stock sooner, rather than later.)

 

[sdtslafan]

That refers to LEAPS short. It is in direct conflict with what I found on selling LEAPS, so I'm assuming there is a difference there?

If a LEAP option is purchased and held for more than 12 months, is the tax treatment long term?

I believe shorting LEAPs is the same thing as selling LEAPS so yes there is a disagreement between the 2 articles. However, I don't think that tax is much different between short term and long term at a total income of 290k. It comes out to about 24% either way. Feel free to PM me if you'd like to discuss further.

 

[CyberDutchie]

Forget the CARES Act. Why not roll your 401k over to an IRA?

Withdrawals from (traditional) IRA accounts get taxed at ordinary income tax rates. Proceeds from selling stocks in regular brokerage accounts get taxed capital gains tax rates (on the gains, if held for over a year).

IMO the best in this situation is to hold on to all your shares in your brokerage account, request a line of credit with the account as collateral (typically can borrow up to 30 or 40%). Withdraw from the line of credit what you need to live on. You will owe low interest on the withdrawals (e.g. 2.15%). That owed interest is easily covered by the stock price appreciation. And you don’t even have to pay the interest, it will simply be added to the amount you owe on the line of credit.

Best of all, you pay zero taxes to the tax man.

 

[bigsmooth125]

Wouldn't that line of credit have to be paid back in this scenario by eventually selling some shares in the brokerage account, which would trigger capital gains tax? What am I missing here?

Withdrawals from (traditional) IRA accounts get taxed at ordinary income tax rates. Proceeds from selling stocks in regular brokerage accounts get taxed capital gains tax rates (on the gains, if held for over a year).

IMO the best in this situation is to hold on to all your shares in your brokerage account, request a line of credit with the account as collateral (typically can borrow up to 30 or 40%). Withdraw from the line of credit what you need to live on. You will owe low interest on the withdrawals (e.g. 2.15%). That owed interest is easily covered by the stock price appreciation. And you don’t even have to pay the interest, it will simply be added to the amount you owe on the line of credit.

Best of all, you pay zero taxes to the tax man.

 

[kyzhk]

Since covered calls got brought up -

Suppose you have 200 shares of tsla with two tax lots of 100 shares each, A and B. Suppose also that A has uninterrupted holding period of greater than 1 year. Now we have:

Tax lot A: long term capital gain status
Tax lot B: short term capital gain status with holding period 0 days starting from date T.

Now suppose that on day T+10, you sell one unqualified covered call. For tax treatment can you claim that this unqualified covered call is against tax lot A, instead of tax lot B which would have reset the holding period to 0 by setting holding start date to T+10?

Follow up: If we are allowed to assign covered call against a specific tax lot, that would mean for any combination of X tax lots where X = M + N, M being number of tax lots (each tax lot consisting of 100 shares) with existing long term cap gain status and N being number of tax lots that are in short term capital gain status, we can have at max M unqualified covered call position opened at a given time without impacting holding period on the N tax lots, right?

 

[Evoforce]

Withdrawals from (traditional) IRA accounts get taxed at ordinary income tax rates. Proceeds from selling stocks in regular brokerage accounts get taxed capital gains tax rates (on the gains, if held for over a year).

IMO the best in this situation is to hold on to all your shares in your brokerage account, request a line of credit with the account as collateral (typically can borrow up to 30 or 40%). Withdraw from the line of credit what you need to live on. You will owe low interest on the withdrawals (e.g. 2.15%). That owed interest is easily covered by the stock price appreciation. And you don’t even have to pay the interest, it will simply be added to the amount you owe on the line of credit.

Best of all, you pay zero taxes to the tax man.

Be careful though and do it with the right type of account. My understanding is that if you do that with a Roth, the government can call all of your gains taxable because you are not allowed to use your Roth as collateral for a loan.

 

[CyberDutchie]

Wouldn't that line of credit have to be paid back in this scenario by eventually selling some shares in the brokerage account, which would trigger capital gains tax? What am I missing here?

Eventually, yes, when you sell to pay down or pay off the line of credit, you will have to pay capital gains tax. Also, interest paid on line of credit is not tax deductible like it is with mortgage interest. So there are some down sides too.

But, if you believe TSLA will keep appreciating for decades to come, this is a way to monetize your investment while keeping all your shares. This is what Elon does as well. He said he will be the last one selling. When that time comes his taxes will be ludicrous. Until then they are zero.

 

[Rb48888]

Job ending after 22 years do to Covid next month. Getting a severance package and paid for unused vacation time that could extend after the 39 week unemployment ends out to maybe almost another year. Already have 96 shares of TSLA at 400% gain. Its outperforming my 401k by miles. Completely debt free except for $2,000 on house and $1,800 for a OneWheel.
Would I be crazy to pull $100,000 out under the Cares Act to invest in TSLA. I know about the tax hit, but I miss out on the 10% penalty do to Covid and I pay tax on the rest over the next 3 years.
My thinking is it'll grow faster than my 401k, plus I have money in case *sugar* gets worse. I'd have upwards of 700+ shares of stock to fall back on.
I could start an IRA and max it the first year. Next year taxes would be less if I stay unemployed all year and milk the severance and vacation time money all I can.
Thoughts? Crazy things going thru my mind right now. 2020 just got about as bad as it can get for me now.

We are twinning. Lost my job 11/1/19 after 21 years, similar severance, goals, etc.

One thing to keep in mind is that you will be able to invest your 401k funds into TSLA directly, after moving it to a brokerage as a rollover IRA.

If you don’t need immediate cash, run some calculations. Try to estimate how quickly you could put the Cares Act loan to work, vs how quickly your 401k funds will be available in Rollover. It’s likely a 30-60 day difference, depending on how far you are from your separation date, and how quickly your employer notifies your current 401k custodian of your termination date.

With Battery day and other incoming events on the horizon, I’d be tempted to take the loan, but if you plan on keeping these shares invested long term, the shares you lose to taxes today could also amount to significantly less $ years down the line.

Whatever you choose, do bug your HR department frequently to get that separation notice to your current 401k provider ASAP after your termination date. Mine was batching notifications once per month, and by doing so they kept my 401k funds out of TSLA an extra 60 days. Once I got to the right person, it was settled with a phone call (between employer and fidelity) in an afternoon.

Good luck, and congratulations on starting a new chapter. I hope it works out for you as well as it has for me. I do believe that all of our current challenges are accelerating innovation, and in that way it’s a good time to be starting something new.

 

[EV forever]

Short Sell LEAPS and Taxes



You can also get "screwed" if one of your CC buyers exercises early. (Which I have some I am planning to do that on because I don't want to recognize the gain and pay taxes on it, and I want to start the long term clock on the stock sooner, rather than later.)

I believe shorting LEAPs is the same thing as selling LEAPS so yes there is a disagreement between the 2 articles. However, I don't think that tax is much different between short term and long term at a total income of 290k. It comes out to about 24% either way. Feel free to PM me if you'd like to discuss further.

I don't think there is disagreement between the two articles - they are talking about 2 different scenarios.

If a LEAP option is purchased and held for more than 12 months, is the tax treatment long term?
This article is talking about call options purchased and held for more than 12 months. For e.g. I have June'22 options that I purchased in Feb'20. Since these are in a taxable account, my plan is to hold atleast till March'21 and then sell for a profit. The capital investment was the initial premium paid, and there is no money made or actual profit till the options are sold in March'21. At that point, the profit was is made will be over 13 months of investment and that becomes long term capital gains.

In the second article, Short Sell LEAPS and Taxes the strategy discussed is writing calls or selling short calls. In this case, you are actually generating money on the day you write or sell these calls. You haven't yet invested any money although you already have proceeds from the sale. It appears that you dont need to report these on your taxes for that year. It appears that these are always reported as short term. However, if these get exercised, or assigned at the end of expiration period or they expire worthless - then the entire proceeds from your sold call becomes short term gains to be reported that year!

Is my interpretation correct?

Edit: Just realized something reading the article further, see correction in blue. It appears that short selling calls always incurs short term gains, no matter how long before you close the position!

EDIT: It is a little bit clearer in this article - see excerpt below
Taxation of Covered Calls
"Sold Call Options Tax Implications
The premiums received from selling call options are classified as capital gains. A gain is not realized until an option expires or is bought back with an off-setting buy order. If sold call options expire worthless, the whole premium received is classified as a short-term capital gain. If call options are bought back, the transaction generates either a short-term capital gain or loss, depending on the price paid to buy the options."

 

[bigsmooth125]

OK, accountants and retirement account gurus, I got a nice little puzzle for you. I have a 401k account from a prior employer, a 401k account with my current employer, a traditional IRA (with both pretax and after-tax money in it), a Roth IRA, and a rollover IRA. In my 401k from my prior employer, I have money both in a self-directed brokerage account (invested in TSLA) and in my Vanguard account (invested in a mutual fund). The retirement plan policy required employees to put at least 25% of our money into the Vanguard account. Further, a portion of the money in both the self-directed brokerage account and the Vanguard account is pre-tax; the other portion in each of those accounts is after-tax (Roth).

There are two things I want to do. One, I want to rollover the money in the Vanguard account into my rollover IRA so I can invest it in whatever I want to. Two, I want to perform a backdoor Roth IRA conversion, which means I should try to minimize the amount of money held in all IRAs, in order to minimize the pro-rata taxes I'd have to pay.

If you're still with me, great! Now, what should I do? Should I roll all the money in my 401k with my prior employer into the 401k account with my current employer? How is the pre-tax or after-tax nature of the money in my 401k account tracked? When performing a rollover of any sort, do I need to keep pretax money together and after-tax money together?

Signed,
Dazed and confused

 

[ammulder]

IMO the best in this situation is to hold on to all your shares in your brokerage account, request a line of credit with the account as collateral (typically can borrow up to 30 or 40%). Withdraw from the line of credit what you need to live on. You will owe low interest on the withdrawals (e.g. 2.15%). That owed interest is easily covered by the stock price appreciation. And you don’t even have to pay the interest, it will simply be added to the amount you owe on the line of credit.

So I got an offer for this kind of loan from Etrade today, but the rate was only 2.12 if you had $10M in your brokerage account. Sadly my rate would be much higher. Are there brokers with better loan rates or are you quoting the rates for $10Maires?