Tax discussion, strategies and questions

[JRP3]

Otherwise you're just guaranteeing short-term capital gains (or losses). Which is generally undesirable.

That would depend on the profits I'd think. If I sell a share I bought at $10 for $100 as a long term gain I'll have a larger profit than a share I bought at $90 and sell at $100. Tax rate will be lower on the long term share but actual dollars I have to pay will be higher.

 

[traxila]

Can you cite a case where a tax increase was made retroactive?

Only situations I'm aware of in recent years is when a tax cut or deduction was added or extended retroactively.

From our friends at KPMG:


“FAQ 10: Could legislation be enacted increasing tax rates retroactively?

Possibly. While rare, there are historical precedents for tax rate increases having applied retroactively.7

For example, the Omnibus Budget Reconciliation Act of 1993 (“OBRA ‘93”),8 which was enacted on August 10, 1993, generally provided for higher income tax rates for some individuals and corporations effective for tax years beginning after December 31, 1992.9 OBRA ’93 also reinstated the two highest estate and gift tax rates that had expired at the end of 1992, effective for decedents dying, gifts made, and generation-skipping transfers occurring after December 31, 1992.”

All situations are different but it can be done, and I know that many people on the Dems would be demanding it. And if it really only affects taxpayers at 400k or more....

 

[Knightshade]

From our friends at KPMG:


“FAQ 10: Could legislation be enacted increasing tax rates retroactively?

Possibly. While rare, there are historical precedents for tax rate increases having applied retroactively.7

For example, the Omnibus Budget Reconciliation Act of 1993 (“OBRA ‘93”),8 which was enacted on August 10, 1993, generally provided for higher income tax rates for some individuals and corporations effective for tax years beginning after December 31, 1992.9 OBRA ’93 also reinstated the two highest estate and gift tax rates that had expired at the end of 1992, effective for decedents dying, gifts made, and generation-skipping transfers occurring after December 31, 1992.”

All situations are different but it can be done, and I know that many people on the Dems would be demanding it. And if it really only affects taxpayers at 400k or more....

Both of your examples are only cases where the tax increase applied to the same year it was passed- in other words only retroactive for the same year it became law.

You were trying to suggest a Biden 2021 tax increase could apply to -2020- income such as cap gains.

 

[traxila]

Both of your examples are only cases where the tax increase applied to the same year it was passed- in other words only retroactive for the same year it became law.


You were trying to suggest a Biden 2021 tax increase could apply to -2020- income such as cap gains.

No, I was never trying to say that. My point was that for it to apply in 2021 it would have to be retroactive.

Sorry if I was unclear. 2020 is in the books and nothing will change about its tax laws.

 

[jerry33]

No, I was never trying to say that. My point was that for it to apply in 2021 it would have to be retroactive..

This is correct. Tax laws (and the budget) are made for the following year. So 2021 will be as Trump has set it. Biden's budget doesn't start until 2022. Unless it's retroactive, but I sincerely doubt that will happen.

 

[Prunesquallor]

That would depend on the profits I'd think. If I sell a share I bought at $10 for $100 as a long term gain I'll have a larger profit than a share I bought at $90 and sell at $100. Tax rate will be lower on the long term share but actual dollars I have to pay will be higher.

That’s right. I keep a spreadsheet with all the tax lots that I bought and compute whether they would represent long- or short-term cap gains and what the tax per share would be. Sometimes the more recent lots have lower taxes. The lower profits outweighs the higher tax rate.

 

[mejojo]

We drop 10% when Elon farts. Add profit taking and massive short selling piling on, and I think 30% is conservative. If I had a tax free trading account I would be selling shares. But because of taxes, I don't think I will sell shares with the thought of buying back at the bottom. Too hard to time, and I would need too big a drop.

Can you explain how, even being in a taxable account, it would not be a good thing to sell before a (conservative) 30% drop?

(Assuming that the SP will recover in due time)

 

[BornToFly]

Can you explain how, even being in a taxable account, it would not be a good thing to sell before a (conservative) 30% drop?

(Assuming that the SP will recover in due time)

Between Federal and State taxes, even with long term capital gains, the government will take 25% of my gains. So to buy back the same number of shares, I need a 25% drop. To make it worth the risk, I need more of a drop so I have significantly more shares than I started with. Then there is the timing problem, and the fact that the market rarely does what I want it do, when I want it to.... That being said, I'm keeping all options open and will see how the next three weeks play out. It will be a gamble, so I won't do more than 1/3 of my core shares.

 

[Singuy]

Between Federal and State taxes, even with long term capital gains, the government will take 25% of my gains. So to buy back the same number of shares, I need a 25% drop. To make it worth the risk, I need more of a drop so I have significantly more shares than I started with. Then there is the timing problem, and the fact that the market rarely does what I want it do, when I want it to.... That being said, I'm keeping all options open and will see how the next three weeks play out. It will be a gamble, so I won't do more than 1/3 of my core shares.

I used to think this is true but it's not.
So if you had 100k gains and paid 25k in taxes.
You use 75k to buy tsla again at 25% off to have the same amount of shares.
However those same amount of shares are now post tax vs before. So you don't have to wait for a 25% off at all to break even money wise. You do if you want the same amount of shares but that doesn't really mean anything.

 

[dakh]

I used to think this is true but it's not.
So if you had 100k gains and paid 25k in taxes.
You use 75k to buy tsla again at 25% off to have the same amount of shares.
However those same amount of shares are now post tax vs before. So you don't have to wait for a 25% off at all to break even money wise. You do if you want the same amount of shares but that doesn't really mean anything.

Sure your cost basis will reset to a higher value. I don't see that being particularly beneficial unless you want to cash out relatively soon. And don't forget the stock can go down too and for a long enough time that you have to sell. And then your ability to claim losses for tax purposes will be limited to a pretty small sum, unless you're offsetting a similar sized gain somewhere else. So resetting cost basis might backfire that way.

I think the original thought is that cap gain tax discourages active trading for the purposes of growing your share count as a long term investor, do you at least agree with that statement? Looks to me using options a lot of times is a better alternative vs. getting in and out of shares in a taxable account.

 

[EV forever]

Can you explain how, even being in a taxable account, it would not be a good thing to sell before a (conservative) 30% drop?

(Assuming that the SP will recover in due time)

Between Federal and State taxes, even with long term capital gains, the government will take 25% of my gains. So to buy back the same number of shares, I need a 25% drop. To make it worth the risk, I need more of a drop so I have significantly more shares than I started with. Then there is the timing problem, and the fact that the market rarely does what I want it do, when I want it to.... That being said, I'm keeping all options open and will see how the next three weeks play out. It will be a gamble, so I won't do more than 1/3 of my core shares.

I used to think this is true but it's not.
So if you had 100k gains and paid 25k in taxes.
You use 75k to buy tsla again at 25% off to have the same amount of shares.
However those same amount of shares are now post tax vs before. So you don't have to wait for a 25% off at all to break even money wise. You do if you want the same amount of shares but that doesn't really mean anything.

I think you're missing a couple of factors in this analysis....have you actually worked out how it would go?

It depends a lot on which tax bracket you are in as well as short term or long term etc.
Let's take an hypothetical example.

Say you bought a 1000 shares of TSLA for $100 each. TSLA went up 5X since then, so $500 per share today. Hypothetically, it is expected to spike to 2X then drop by 30% from the peak.

Total shares 1000
Purchase price $100,000
Current value $500,000
Peak value $1,000,000
Stock price after 30% drop from peak $700

1. If you sold at the peak perfectly, you would make a profit of $900,000.

• If this was short term gains, the taxes on this would depend on your tax bracket and the state of residency. For me,this would be 37% federal and 13.3% CA state tax - approximately 50%. You are left with 450,000 in profit after paying tax. Add the initial cost basis of 100,000 for total of $550,000 to buy back shares after the drop. So total shares at the end = 785 shares.
  • So, with an overall tax liability of 50%, trying to buy back after a 30% drop actually gives you less shares than if you simply HODL
• If this was long term gains, the taxes would be 20% for federal and 13.3% for CA state ~ total 33%. Now you are left with $603,000 in profit after paying taxes. Add the initial cost basis of 100,000 for total of $703,000 to buy back shares after the drop. So total shares at the end = 1004 shares.
  • So, in this case, the reward for timing the market perfectly to sell at the peak and to buy after a 30% drop is a measely 4 shares. Not really worth for me.

So, my general conclusion is that if one wants to sell at peak and buy back after a drop in a taxed account, then this is only profitable if the expected drop exceeds your total tax bracket. Since I am in an overall 50% short term and 33% long term tax bracket, playing this game is not worth it, especially since my final goal is to accumulate shares long term.

The math for your case may be different of course, dependent on your tax bracket.

If there are any flaws in my math, please point these out to me. Maybe I am missing a highly profitable venture due to tax considerations.

 

[EV forever]

Reposting my response from the main thread here, as it belongs under the tax questions and strategies heading

We drop 10% when Elon farts. Add profit taking and massive short selling piling on, and I think 30% is conservative. If I had a tax free trading account I would be selling shares. But because of taxes, I don't think I will sell shares with the thought of buying back at the bottom. Too hard to time, and I would need too big a drop.

Can you explain how, even being in a taxable account, it would not be a good thing to sell before a (conservative) 30% drop?

(Assuming that the SP will recover in due time)

I used to think this is true but it's not.
So if you had 100k gains and paid 25k in taxes.
You use 75k to buy tsla again at 25% off to have the same amount of shares.
However those same amount of shares are now post tax vs before. So you don't have to wait for a 25% off at all to break even money wise. You do if you want the same amount of shares but that doesn't really mean anything.

I think you're missing a couple of factors in this analysis....have you actually worked out how it would go?

Sure your cost basis will reset to a higher value. I don't see that being particularly beneficial unless you want to cash out relatively soon. And don't forget the stock can go down too and for a long enough time that you have to sell. And then your ability to claim losses for tax purposes will be limited to a pretty small sum, unless you're offsetting a similar sized gain somewhere else. So resetting cost basis might backfire that way.

I think the original thought is that cap gain tax discourages active trading for the purposes of growing your share count as a long term investor, do you at least agree with that statement? Looks to me using options a lot of times is a better alternative vs. getting in and out of shares in a taxable account.

It depends a lot on which tax bracket you are in as well as short term or long term etc.
Let's take an hypothetical example.

Say you bought a 1000 shares of TSLA for $100 each. TSLA went up 5X since then, so $500 per share today. Hypothetically, it is expected to spike to 2X then drop by 30% from the peak.

Total shares 1000
Purchase price $100,000
Current value $500,000
Peak value $1,000,000
Stock price after 30% drop from peak $700

1. If you sold at the peak perfectly, you would make a profit of $900,000.

• If this was short term gains, the taxes on this would depend on your tax bracket and the state of residency. For me,this would be 37% federal and 13.3% CA state tax - approximately 50%. You are left with 450,000 in profit after paying tax. Add the initial cost basis of 100,000 for total of $550,000 to buy back shares after the drop. So total shares at the end = 785 shares.
  • So, with an overall tax liability of 50%, trying to buy back after a 30% drop actually gives you less shares than if you simply HODL
• If this was long term gains, the taxes would be 20% for federal and 13.3% for CA state ~ total 33%. Now you are left with $603,000 in profit after paying taxes. Add the initial cost basis of 100,000 for total of $703,000 to buy back shares after the drop. So total shares at the end = 1004 shares.
  • So, in this case, the reward for timing the market perfectly to sell at the peak and to buy after a 30% drop is a measely 4 shares. Not really worth for me.

So, my general conclusion is that if one wants to sell at peak and buy back after a drop in a taxed account, then this is only profitable if the expected drop exceeds your total tax bracket. Since I am in an overall 50% short term and 33% long term tax bracket, playing this game is not worth it, especially since my final goal is to accumulate shares long term.

The math for your case may be different of course, dependent on your tax bracket.

If there are any flaws in my math, please point these out to me. Maybe I am missing a highly profitable venture due to tax considerations.

 

[Crowded Mind]

It depends a lot on which tax bracket you are in as well as short term or long term etc.
Let's take an hypothetical example.

Say you bought a 1000 shares of TSLA for $100 each. TSLA went up 5X since then, so $500 per share today. Hypothetically, it is expected to spike to 2X then drop by 30% from the peak.

Total shares 1000
Purchase price $100,000
Current value $500,000
Peak value $1,000,000
Stock price after 30% drop from peak $700

1. If you sold at the peak perfectly, you would make a profit of $900,000.

• If this was short term gains, the taxes on this would depend on your tax bracket and the state of residency. For me,this would be 37% federal and 13.3% CA state tax - approximately 50%. You are left with 450,000 in profit after paying tax. Add the initial cost basis of 100,000 for total of $550,000 to buy back shares after the drop. So total shares at the end = 785 shares.
  • So, with an overall tax liability of 50%, trying to buy back after a 30% drop actually gives you less shares than if you simply HODL
• If this was long term gains, the taxes would be 20% for federal and 13.3% for CA state ~ total 33%. Now you are left with $603,000 in profit after paying taxes. Add the initial cost basis of 100,000 for total of $703,000 to buy back shares after the drop. So total shares at the end = 1004 shares.
  • So, in this case, the reward for timing the market perfectly to sell at the peak and to buy after a 30% drop is a measely 4 shares. Not really worth for me.

So, my general conclusion is that if one wants to sell at peak and buy back after a drop in a taxed account, then this is only profitable if the expected drop exceeds your total tax bracket. Since I am in an overall 50% short term and 33% long term tax bracket, playing this game is not worth it, especially since my final goal is to accumulate shares long term.

The math for your case may be different of course, dependent on your tax bracket.

If there are any flaws in my math, please point these out to me. Maybe I am missing a highly profitable venture due to tax considerations.

You are missing the fact that you start off your renewed position with a higher cost basis which will reduce your tax liability when (if) you sell again.

In your scenario, the share price went from $100 to $1,000 to $700. Let’s say after you re-buy it goes to $1,400. Here’s the example under short term taxes.

With sale:
Part 1 was $900k gains, $450k tax
Part 2 is your remaining $550k * 2, so $550k gains, $275k tax (assuming short term)
Total gains $1.450M, total tax $725k. Net $725k.

Without sale:
Assuming also short term, total gains $1.3M, total tax $650k. Net $650k.

Obviously all of this will vary based on tax rates but restarting with a higher cost basis offsets some of the downside of the tax burden. But good luck calling timing and buying back -30% from when you sold.

 

[TravelFree]

The math for your case may be different of course, dependent on your tax bracket.

If there are any flaws in my math, please point these out to me. Maybe I am missing a highly profitable venture due to tax considerations.

Nice illustration.

Couple of suggestions. First of all I use this strategy to build shares around a core position that grows and most of the shares in the holding is long term wealth building. Not the same as long term share holding. Second, it works best in a Roth IRA where you never have a tax penalty for making money. Third, you need to play this sell high and buy back low with high frequency so it builds smaller amounts of cash that adds up faster. Ever since we got free trades from our broker, we no longer have to make sure the commissions are covered so trade as soon as your balance available for trading is cleared. Usually a day or two.

Not to be political, but just stating what we may get for tax year 2021 is a complete rewrite of the cap gains tax rules, possibly eliminating the long term / short term rules and all gains are ordinary income. Nothing in the proposed changes is favorable to us, especially if you are in high tax bracket. For us retired folks living on a modest income, we do well with trading in a tax deferred or tax free account, and then try to live on income from SS and fun money up to a the point just before triggering a big tax bill. This plan works well for us, until the thieves in Washington implement the wealth tax too. Then it will be time to hide out in Grand Cayman.

 

[EV forever]

You are missing the fact that you start off your renewed position with a higher cost basis which will reduce your tax liability when (if) you sell again.

In your scenario, the share price went from $100 to $1,000 to $700. Let’s say after you re-buy it goes to $1,400. Here’s the example under short term taxes.

With sale:
Part 1 was $900k gains, $450k tax
Part 2 is your remaining $550k * 2, so $550k gains, $275k tax (assuming short term)
Total gains $1.450M, total tax $725k. Net $725k.

Without sale:
Assuming also short term, total gains $1.3M, total tax $650k. Net $650k.

Obviously all of this will vary based on tax rates but restarting with a higher cost basis offsets some of the downside of the tax burden. But good luck calling timing and buying back -30% from when you sold.

Disagree with your calculations.
What is part 2? The 900k profit is from selling the entire 1000 shares at $1000 each. Then you rebuy 785 shares at $700 each. Now if this goes to $1400, you are paying taxes on $549,500 profit. Assuming same tax bracket, that is net proceeds of 875K. This requires you to time the market perfectly.

If you never sold, you would have 1000 shares at $1400 for 1.3M in profits. However, these are now likely to be long term profits. So taxes will be 33% or 429k. Net proceeds 971k. This requires you to do nothing except HODL.

 

[EV forever]

Nice illustration.

Couple of suggestions. First of all I use this strategy to build shares around a core position that grows and most of the shares in the holding is long term wealth building. Not the same as long term share holding. Second, it works best in a Roth IRA where you never have a tax penalty for making money. Third, you need to play this sell high and buy back low with high frequency so it builds smaller amounts of cash that adds up faster. Ever since we got free trades from our broker, we no longer have to make sure the commissions are covered so trade as soon as your balance available for trading is cleared. Usually a day or two.

Not to be political, but just stating what we may get for tax year 2021 is a complete rewrite of the cap gains tax rules, possibly eliminating the long term / short term rules and all gains are ordinary income. Nothing in the proposed changes is favorable to us, especially if you are in high tax bracket. For us retired folks living on a modest income, we do well with trading in a tax deferred or tax free account, and then try to live on income from SS and fun money up to a the point just before triggering a big tax bill. This plan works well for us, until the thieves in Washington implement the wealth tax too. Then it will be time to hide out in Grand Cayman.

Original question which was quoted in my post was specifically regarding taxed account. My example in response was specifically regarding taxed account.

I trade options as well as stock actively and extensively in my IRA. My response does not apply to tax deferred accounts.

My conclusion, trying to time the peak for selling and then the drop for re-buying in a taxable account doesn’t make much sense.

 

[astrotoy]

For me, tax planning is more complicated than the examples above, particularly, if you are planning to hold TSLA for the very long term. There were three big changes in the 2017 tax law that had major potential effects.

First was the major change in the deductibility of state tax again the Federal tax. This primarily affects states like CA, which have very high state taxes. You can see that in examples given earlier on paying federal and state capital gains, particularly when CA doesn't have a lower long term capital gains rate.

Second, for people like me who hold our shares in tax free accounts (Mine are all in a Roth IRA). My plan is to have the Roth as an estate planning tool. The law changed the rules so that my beneficiaries can only hold the assets in an inherited Roth tax free for 10 years after my death (or my spouse whoever lives the longest) rather than their lifetime (with some RMD - required minimum distribution). This decreases the value of a Roth (although it still is very good - since it also doesn't require me to take any RMD).

Third, the estate tax limit was doubled (still increasing by inflation each year). This has a huge effect as TSLA shares increase in value. Mine, purchased in the Roth in late 2013 and early 2015, are approaching a 20 bagger, a level where, including our other assets, put estate tax into play. At 40% estate tax is significant (some states also have their own estate taxes on top of federal). However, the big unknown is whether this higher limit will end in 2026, since the increase in the estate tax limit sunsets then. It will take a new law to keep it going.

A fourth tax issue which is currently very advantageous, is that if you keep TSLA or any appreciated asset until your death, the cost basis of the asset is readjusted to the market value at your death. So if you keep TSLA long enough, you may escape any capital gains tax on its growth while you were alive.

Tax laws are definitely subject to change, so as your wealth in TSLA multiplies, you probably need to keep in mind some or all of these complications. At 75, I am probably much more aware than most of you about such things.

 

[dakh]

My conclusion, trying to time the peak for selling and then the drop for re-buying in a taxable account doesn’t make much sense.

Thanks for the mods to direct the discussion to an appropriate thread! Only thing I can add is, keep your shares as-is in your taxable account and use options if you have a high conviction on what the stock is going to do (both direction and timing).

 

[Crowded Mind]

Disagree with your calculations.
What is part 2? The 900k profit is from selling the entire 1000 shares at $1000 each. Then you rebuy 785 shares at $700 each. Now if this goes to $1400, you are paying taxes on $549,500 profit. Assuming same tax bracket, that is net proceeds of 875K. This requires you to time the market perfectly.

If you never sold, you would have 1000 shares at $1400 for 1.3M in profits. However, these are now likely to be long term profits. So taxes will be 33% or 429k. Net proceeds 971k. This requires you to do nothing except HODL.

It’s math, you can’t disagree with it.

Part 2 is $550k into TSLA at $700 like you said (so 785.7 shares). If if then doubles to $1,400, you have $1.1M with a gain of $550k. Short term tax would be $275k as you laid it out, netting $275k in addition to the net from the first part of the trade, which netted $450k, so total net is $725k.

If the other scenario is also short term, you gain $1.3M and net $650k under the tax rate you presented. Obviously if you change that scenario to long term, you will pay less in taxes. The point is that you should consider the impact of a higher cost basis on your second sale if you are analyzing this type of situation.

Mind-boggling that there were disagrees on this post. Again, it’s just math.

 

[TravelFree]

My conclusion, trying to time the peak for selling and then the drop for re-buying in a taxable account doesn’t make much sense.

I agree with that for a high tax bracket but I have executed the strategy in a taxable account as well as IRA and with a more modest income with very low tax impact, it can work not much different than a Tax deferred account. But I do understand you were responding to someone who is in a different tax bracket than me.