Tax questions, implications and strategies

[DaveT]

A lot of us are going to have to deal with tax issues when we report our 2013 taxes considering the dramatic rise in TSLA's stock price (and options).

So I'm starting a thread for us to share questions, insights and advice regarding tax implications. This is for those who already have stock/option gains and also for those who are considering purchasing new stock/options and have questions.


Disclaimer: I know probably none of us are accountants (maybe there might be a few) and we're from different countries. So, this thread isn't for strict, accountable advice. Rather it's more a preliminary stage to field questions. Before making a major financial/investment decision, make sure to consult your accountant because each person's situation can be different.

 

[AudubonB]

Smartypants answer #1: Make a lot of other dumb trades and offset your ST gains in TSLA with your ST losses in ManWasIDumbDotCom.

Smartypants answer #2: Don't sell. Don't sell. Don't sell. My investments in a whole coffee-plantation-worth of a rolled-over-and-died IPO called Starbucks now is such that its paltry dividend is for all intents and purposes equal to my per-share cost. Entry point for a little company one J.D.Rockefeller Sr. started long before even I was born is not a whole lot different.

Smartypants answer #3: If you're going to be a trader, confine trading to your tax-deferred IRA.

Almost-usable answer #4: If you're sitting on a passel of unrealized gains and are worried about s-t fluctuations, cover your butt with options.

Good luck!

 

[ggr]

So, as a California resident, my accountants advised various stuff. This is advice from them to me, obviously I'm not qualified to give this advice to anyone else, and anyway I don't know others' situations, so don't blame me.

I don't currently have to pay estimated tax. I believe their answers would be different if I did. I almost certainly will have to next year.

In December I should figure out how much capital gains (long term and short term) I made on all my trading this calendar year. This will actually be easy for me, since I keep a spreadsheet with all the trades. I could probably also get the same info from my broker, but I maintain the spreadsheet so that I'm continually reviewing the consequences of my good and bad trades.

Then, in December, I should pre-pay the CA state tax I estimate. This is because it's deductible from the income for Federal tax in the year in which it is paid, not the year it's due, so this will even out the total amount at least a little bit. Note that if you need to pay more than a certain amount (I forget how much, but if you're thinking about the problem, this means you!) CA now insists that it must be paid electronically, and it takes a non-trivial amount of time to set up to do that, so don't leave it till the last minute.

I can wait until April to pay the Federal tax. Note that this will probably require not only the actual estimated tax (my tax always takes longer to finalize, due to being Australian and having investments over there, but you have to pay up front), but I will probably have to pay quarterly estimated tax for the 2014 following year.

They also put in a very strong hint to make sure that I have enough money on hand to pay what I need to pay. This is important advice. If it's all tied up in Tesla stock, and everyone needs to cash out at the same time, it could easily force the price down. If you need proof, look back to 2001, and note just when the real dip from the Internet Bubble hit; it was pretty close to when all the Sillycon Valley people's tax came due on all the bubble stocks from 2000. While I personally avoided that trap, I have a friend who lost his house over it; he owed more tax on the profits from 2000 than the investments were worth in April 2001.

As AudobonB said, if you keep holding you don't owe the tax yet! Wait until you retire then sell it in little bits

Of course you can't hold options that way; they expire! If you sell the options before expiry for a profit, that is (probably short term) capital gains. But if they were calls, and you exercise them and turn them into shares, you just add the cost of the calls to the cost basis of the converted shares, and don't owe any tax yet. However the clock restarts for the holding period, so you have to wait a year from exercise before the gains become long term, no matter how long you held the options.

 

[Jonathan Hewitt]

If you buy a Model S you get a $7500 federal tax rebate. I'm going to do this to nullify a lot of the taxes I would've had to have paid otherwise

 

[sleepyhead]

I actually have a masters degree in accounting, but still take the things I say with a grain of salt.

Depending on your tax bracket the difference between l-t tax rate and s-t tax may not be that big. Say you are in 25% tax bracket, your l-t gain would be 15%. If you are spending 10% to hedge your position with puts, then you might as well be selling today if you are only holding to meet the 1 year l-t tax threshold.

Example: Say you bought $60,000 in shares and are up $40,000 in gains and have held for 5 months only. You can sell today and pay $10,000 in taxes (assuming you don't jump to higher 28% marginal tax rate). Or you can hedge today with J14 ATM put options and pay a 20% premium or $20,000 which makes no sense. OTM options for J14 are still expensive. In doesn't make much sense to hedge purely for tax reasons.

My best advice is to trade the best you can and do not factor taxes into your trade decisions. Only in very rare circumstances people need to consider tax implications and those people should consult a CPA. Most people should focus more on pocketing gains and not thinking too much about holding solely for l-t tax purposes. I am not advocating to sell but just saying if you think the stock may correct then sell.

I know I am not selling, because I think it is going up. My wife is a CPA, but we know better not to focus too much on tax implications.

Here is a semi-tax strategy I could recommend though: If I thought a big correction was coming, I would sell my Tesla stock say at $120, and have to pay s-t capital gains tax. But if the stock were to go down it would have been a good move. In which case I would buy some call options. If they go up I win, if they don't then you still bought them at a 25% discount because the loss would offset the earlier s-t capital gain you had and up to 39.6% if you are in highest tax bracket.

 

[DaveT]

Here's an informative 2013 tax guide from Fidelity. Has some helpful info.

A taxpayers guide to 2013 - Fidelity Investments

 

[sleepyhead]

Based on that link DaveT provided here is the best tax strategy that I have come up with:

Buy as much Tesla shares as possible. Hold on for a few years, stock will go gangbusters, quit your job, retire and sell $72,500 (or even more with deductions) worth of shares every year and pay $0 in taxes. Sounds like a winner to me if you bought enough shares initially and as long as you can live off of $72,500 a year.

 

[jak]

I'm not an expert in taxes, but wouldn't that mean my long-term capital gains would be 0% if I retire and my social security, interest, dividend incomes stay below $72,500. i.e. Would I be able to withdraw a million dollars worth of gains and be taxed at 0% on the gains because my income was less than 72.5K or would the gains also be considered income, thus I'd have to pay some major tax on that?

 

[sleepyhead]

I'm not an expert in taxes, but wouldn't that mean my long-term capital gains would be 0% if I retire and my social security, interest, dividend incomes stay below $72,500. i.e. Would I be able to withdraw a million dollars worth of gains and be taxed at 0% on the gains because my income was less than 72.5K or would the gains also be considered income, thus I'd have to pay some major tax on that?

To keep it simple (in reality taxes are more complicated): if you have $20k in other income, then you can realize up to $52.5k of L-T Cap gains that year and pay 0% on the L-T Cap gains. If you realize $1,000,000 of LTCG then the rest above $72.5k will be taxed at 15% and then 20%, and you might incur additional medicare taxes too. If you earn $70k, then only the first $2.5k of LTCG is taxed at 0% and the rest at 15% or 20%.

Note the $72.5k threshold is for married filing jointly. That number is only half for single individuals.

 

[pGo]

Any idea if one should pay estimated taxes every quarter as they get profit from Tesla stock/options? If so what are the rules?

 

[simplesolar]

if anyone is interested. I have the opposite problems. I have too much tax credit from all the solar assets I own. Need to pass them through to someone.

 

[montgom626]

if anyone is interested. I have the opposite problems. I have too much tax credit from all the solar assets I own. Need to pass them through to someone.

I volunteer!!!!! Solar credits can be rolled over to the next year. EV tax credit cannot be rolled over (unless things have changed). I did my solar 4 years ago.

 

[DaveT]

Just a heads up. If you have a lot of taxable realized gain from this year, talk to your accountant now before year-end to evaluate your tax consequences and options.

 

[austinEV]

My situation is that i have a large IRA account and a smaller cash account. During the heyday mid-year, I decided to start investing my cash account too, even though that wasn't wise since I really needed that money for our house, then under construction. I ended up turning our $40k cash buffer into nearly $250. (upgrades? sure!) By dumb luck, I had to cash out when the house expenses started to come in, and that timing picked the top. My IRA on the other hand, I kept on and took the Q3 losses in there.

So my realized profits of ~200k are in my cash account, and my much larger losses are in a tax deferred account. Brilliant, right?

So I figure I have to pay ~60k in taxes right? I am just figuring out what expenses I can push into this year, like paying property taxes in Dec rather than Jan.

 

[Robert.Boston]

My situation is that i have a large IRA account and a smaller cash account. During the heyday mid-year, I decided to start investing my cash account too, even though that wasn't wise since I really needed that money for our house, then under construction. I ended up turning our $40k cash buffer into nearly $250. (upgrades? sure!) By dumb luck, I had to cash out when the house expenses started to come in, and that timing picked the top. My IRA on the other hand, I kept on and took the Q3 losses in there.

So my realized profits of ~200k are in my cash account, and my much larger losses are in a tax deferred account. Brilliant, right?

So I figure I have to pay ~60k in taxes right? I am just figuring out what expenses I can push into this year, like paying property taxes in Dec rather than Jan.

Sounds right to me; you might look around for unrealized ST losses in other parts of your taxable portfolio.

Oh, and I hope that this was a typo, omitting an all-important "k":

I ended up turning our $40k cash buffer into nearly $250.

 

[austinEV]

Sounds right to me; you might look around for unrealized ST losses in other parts of your taxable portfolio.

Oh, and I hope that this was a typo, omitting an all-important "k":

Yes, 250k, sorry about that. I highly recommend falling into $200k for anyone who is completing construction of a new custom house. It streamlined quite a bit.

I don't actually have any taxable losses. I managed to isolate them all in my tax deferred accounts. My Taxable accounts were just tesla stock and options, and another account with boring bond funds and dividend stocks that are doing fine. Those I am holding for preferred dividend status.

 

[ggr]

Yes, 250k, sorry about that. I highly recommend falling into $200k for anyone who is completing construction of a new custom house. It streamlined quite a bit.

There are many worse problems to have.

In California, you can pre-pay estimated State tax payments at the end of December, to claim them against your federal taxes next year. I don't know whether you can do that for property taxes though.

 

[sleepyhead]

My situation is that i have a large IRA account and a smaller cash account. During the heyday mid-year, I decided to start investing my cash account too, even though that wasn't wise since I really needed that money for our house, then under construction. I ended up turning our $40k cash buffer into nearly $250. (upgrades? sure!) By dumb luck, I had to cash out when the house expenses started to come in, and that timing picked the top. My IRA on the other hand, I kept on and took the Q3 losses in there.

So my realized profits of ~200k are in my cash account, and my much larger losses are in a tax deferred account. Brilliant, right?

So I figure I have to pay ~60k in taxes right? I am just figuring out what expenses I can push into this year, like paying property taxes in Dec rather than Jan.

I think you might need a little more for taxes, but that depends on how much you and your wife made this year. Lets assume that you both made $150k this year. With $210k in investment income that is $360k total. In this case you will owe almost 33% on your investment income (assuming that your payroll deductions are pretty accurate as far as taxes go). Also any MAGI above $250k (married) and you pay additional 3.8% Obamacare tax on passive income. So you are looking at ~35% on your $210k of passive income or roughly $80k.

Best way to minimize that tax is to lower your taxable income or MAGI specifically. Your marginal tax bracket is 36.8% (in my scenario), so I would recommend maxing out your 401k, IRA, 457 (if you have one), etc.

If you qualify for trader status (you probably don't) then you can write off that lunch that you were offering to take me to; as long as we go by the end of the year. Let me know if Thursday the 26th works for you?

 

[austinEV]

I think you might need a little more for taxes, but that depends on how much you and your wife made this year. Lets assume that you both made $150k this year. With $210k in investment income that is $360k total. In this case you will owe almost 33% on your investment income (assuming that your payroll deductions are pretty accurate as far as taxes go). Also any MAGI above $250k (married) and you pay additional 3.8% Obamacare tax on passive income. So you are looking at ~35% on your $210k of passive income or roughly $80k.

Best way to minimize that tax is to lower your taxable income or MAGI specifically. Your marginal tax bracket is 36.8% (in my scenario), so I would recommend maxing out your 401k, IRA, 457 (if you have one), etc.

If you qualify for trader status (you probably don't) then you can write off that lunch that you were offering to take me to; as long as we go by the end of the year. Let me know if Thursday the 26th works for you?

I am loving the personalized tax advice! Fortunately(?) my wife makes closer to zero. She has a lovely retail biz that employs people but generally makes little or provides a paper loss. I suspect this year will be a doozy so my 60k estimate might be on the high end. I might be at risk of running into hobby-loss rules in fact.

I will send you contact info on that lunch. Sounds like I need to run up a big lunch bill to zero out my taxes.

 

[sleepyhead]

I am loving the personalized tax advice! Fortunately(?) my wife makes closer to zero. She has a lovely retail biz that employs people but generally makes little or provides a paper loss. I suspect this year will be a doozy so my 60k estimate might be on the high end. I might be at risk of running into hobby-loss rules in fact.

I will send you contact info on that lunch. Sounds like I need to run up a big lunch bill to zero out my taxes.

Even if you don't qualify for "trader status" I still think that you can write off any investment related expenses as long as you itemize deductions and have miscellaneous losses above 2% of AGI, with the first 2% not deductible.