Capital gains taxes

[Bill Dufour]

A simple and very stupid question. If I buy say $100,000 worth of a stock and it goes up in value. If I sell some portion of the same stock for $100,000 in under one year do I owe any capital gains tax at all?
What happens to the remainder if I sell it 13 months after purchase will it have a zero cost basis to calculate the gains then? What if it goes down instead.
Bil lD

[Jim Koepke]

You would be best informed on all the issues involved by talking to a tax professional.

There may be a difference between short term holding vs long term holdings.

My understanding as far as what you pay taxes on is the sale price of the shares sold minus the cost of the shares when purchased.

If the price is down when you sale you may be able to use the loss as an offset on other income.

This is why you should talk to a tax professional. Seeking answers from people like me may get you not only outdated information it may be information that could earn you a residence at club fed.

If a person can invest $100,000 in the stock market, they should be able to invest a few hundred for an accountant to make sure their taxes are prison proof.

jtk

[David Bassett]

If this is a real situation Jim's advice is golden!

Assuming a hypothetical situation, there are a few things I remember that'll give you an idea about the tax liability.

First you owe tax on the shares you sell. What tax depends on how long you held the stocks before selling, at one point less than a year was taxed ordinary income and over was long-term capital gains taxed at lower rate. (The holding period is one of the revenue knobs they can turn without "raising taxes", so don't trust it hasn't changed!)

So, if your $100K doubled and you then sold half, or $100K worth, you'd owe tax on $50K, (i.e. $100K sale less $50K cost,) and still have $100K of stock with a $50K cost (or basis.)

PS- it's a *LOT* more complicated if you didn't buy all of the shares at the same price, which is what would happen with a regular monthly purchase instead of a lump sum purchase at one point.

[Jim Matthews]

https://smartasset.com/investing/capital-gains-tax-calculator#EBGJW4d5qT

[Jerry Bruette]

Depends how you invested it. IRA, 401K, Roth version of each, or a regular brokerage account not covered by a tax deferred account.

You owe tax on profits. You can subtract any brokerage fees for buying and selling from the profits also.

[Doug Dawson]

A simple and very stupid question. If I buy say $100,000 worth of a stock and it goes up in value. If I sell some portion of the same stock for $100,000 in under one year do I owe any capital gains tax at all?
What happens to the remainder if I sell it 13 months after purchase will it have a zero cost basis to calculate the gains then? What if it goes down instead.
Bil lD
I highly recommend the J.K. Lasser books, e.g. https://www.amazon.com/J-K-Lassers-Your-Income-2021-dp-1119742242/dp/1119742242/ref=dp_ob_title_bk

It’s 12 bucks, and very comprehensive. Good quarantine reading, especially right now!

For an investment made in 2021, who knows, as the tax laws may change yet again.

[Jim Koepke]

For an investment made in 2021, who knows, as the tax laws may change yet again.

That is something you can bet on.

jtk

[Ron Citerone]

I would read up on it as others have suggested if for no other reason than knowing the tax implications of investing is better known up front for future decisions. I have done the capital gain thing myself quite a few times with no problems. If after educating yourself, if you still aren’t sure hire a tax professional. Worth it for your peace of mind and future hassles.

[Bill Dufour]

Thanks for the responses. i learned from them that I made a mistake when I cashed out my stocks when the pandemic hit. I bought them back in a few months after they bottomed out so I did make money that way. If I sell them now I would have to pay income taxes on the gains which will also push any long term sales into a higher tax bracket.
For my situation it looks like it will be a good idea to use the stock as collateral to get a loan to buy the new house. Then pay off most of the loan when we sell the old house and wait a few months until the stocks go long term to sell them to pay off the rest of the loan. Paying about 8% annual interest for a few months is better then paying about 30% in Federal + state taxes.
Bill D

My friend's daughter is an account for a national tax firm. I will talk to her to make sure. My Schwab brokerage office is closed for the duration and I needed an answer before new years. That is why I asked here to get some background so I had some idea what to ask her.

[Bruce Wrenn]

I would read up on it as others have suggested if for no other reason than knowing the tax implications of investing is better known up front for future decisions. I have done the capital gain thing myself quite a few times with no problems. If after educating yourself, if you still aren’t sure hire a tax professional. Worth it for your peace of mind and future hassles.


Ever hear of a web site: "IRS.GOV"?

[Ronald Blue]

Last time I had a mortgage it was 3%. (2011) The construction loan was around 4% 2 years ago. 8% even for a short term seems very high. I see they are currently advertising 15 year mortgages here at a little over 2% and 30 year close to 3% in my area. Everything must be more expensive out there. As for the stocks it sounds like you've received some good advice but only your tax person can tell you absolutely where the chips will land.

[Michael Weber]

I have read that a bank will never give anything close to current market value for a stock used as collateral and may not accept it at all.

[Ron Citerone]

Ever hear of a web site: "IRS.GOV"?

Yes I have.

[Bruce King]

Whatever brokerage you use is required to send you a summary of all short term, long term etc gains and losses. Basically, money made in investments in less than a year has more tax liability. The standard deduction these days is what, about 24k vs a few thousand from decades past so remember that icing on the cake.

[Bill Dufour]

I agree the 8% interest is high but for a loan lasting under one year I think it makes sense in my situation. no prepayment penalty, no assessment fee, no points, no loan origination fees, no document fees. I do not think there are even any notary fees.
Of course the loan interest is probably not deductible.
Bill D.

[Brian Tymchak]

Thanks for the responses. i learned from them that I made a mistake when I cashed out my stocks when the pandemic hit. I bought them back in a few months after they bottomed out so I did make money that way. If I sell them now I would have to pay income taxes on the gains which will also push any long term sales into a higher tax bracket.
For my situation it looks like it will be a good idea to use the stock as collateral to get a loan to buy the new house. Then pay off most of the loan when we sell the old house and wait a few months until the stocks go long term to sell them to pay off the rest of the loan. Paying about 8% annual interest for a few months is better then paying about 30% in Federal + state taxes.
Bill D

My friend's daughter is an account for a national tax firm. I will talk to her to make sure. My Schwab brokerage office is closed for the duration and I needed an answer before new years. That is why I asked here to get some background so I had some idea what to ask her.

I don't think your question in your very first post was answered. If I missed it in the thread my apologies. Gains are calculated using the delta in share price, not on the total cost basis. Thus, you would pay taxes on gains in your scenario unless offset by other losses and assuming your account is not a tax deferred retirement account.

You mentioned you have a Schwab brokerage account. Via the Web interface, under Accounts > History > Realized Gain / Loss, you will see what Schwab will report to IRS concerning the trade.

[Dave Mills]

I agree the 8% interest is high but for a loan lasting under one year I think it makes sense in my situation. no prepayment penalty, no assessment fee, no points, no loan origination fees, no document fees. I do not think there are even any notary fees.
Of course the loan interest is probably not deductible.
Bill D.

I of course don't know your situation, but when I built my house I did the majority of it with a margin loan (against my equity investments) at Schwab. Their current rate is about 4.5%

[Bill Dufour]

I of course don't know your situation, but when I built my house I did the majority of it with a margin loan (against my equity investments) at Schwab. Their current rate is about 4.5%

That is pretty much the same as what I will do but it is about 4.5% plus a floating LIBOR rate of around 1/5% per month. I will talk to them about a bridge loan as well.

[Dave Mills]

That is pretty much the same as what I will do but it is about 4.5% plus a floating LIBOR rate of around 1/5% per month. I will talk to them about a bridge loan as well.
It was super convenient, aside from the stress of wondering what the market may do while I was margined up to my neck :)

[Jim Koepke]

Thanks for the responses. i learned from them that I made a mistake when I cashed out my stocks when the pandemic hit. I bought them back in a few months after they bottomed out so I did make money that way. If I sell them now I would have to pay income taxes on the gains which will also push any long term sales into a higher tax bracket.
[edited]
My friend's daughter is an account for a national tax firm. I will talk to her to make sure. My Schwab brokerage office is closed for the duration and I needed an answer before new years. That is why I asked here to get some background so I had some idea what to ask her.

Ask your friend's daughter if "wash sale" rules or any others of buying and selling the same stocks may apply to you. Being this is a time related rule applying mostly to taxes, if a few months passed between the selling and buying you may be in the clear.

Then there may be a different problem. Many people fell for the idea of the covid-19 pandemic being a hoax.

What was involved in your decision to sell as the pandemic hit? If it occurred from your own deductive reasoning that is one thing. If it was because of information you received that wasn't available to the general public you could have a problem.

jtk

[Doug Dawson]

What was involved in your decision to sell as the pandemic hit? If it occurred from your own deductive reasoning that is one thing. If it was because of information you received that wasn't available to the general public you could have a problem.


Methinks China’s 31 December 2019 public alert to the problem was a big enough notice to cover most subsequent stock trades. Unless you were one of the “in crowd” and had even more information than that.

Public discussion of the economic effects of a potential pandemic has been circulating for many years now.

[Bill Dufour]

Thanks for the link to the Schwab history and profit/loss statements. Turns out I gained less then $9,000 with selling and buying back so not much taxes to worry about. I suppose that means my own idea to bail did not do much gain. But I think it stopped the loss from getting worse. This was mainly the Schwab mutual funds I inherited from my mother and some where I sold inherited stocks and bought the mutual funds instead. So no years of compounded gains to pay taxes on.
No special information for my sell decision so no worries there. I suppose when I used to work at the lab that could be an issue. I never heard of anyone getting in trouble. I have a feeling that there is some pressure on the government not to hassle folks with a Nobel prize over an investment.

[Brian Tymchak]

. Turns out I gained less then $9,000 with selling and buying back so not much taxes to worry about.

One thing I learned the hard way (though not too costly of a lesson) is that the IRS expects you to pay estimated taxes quarterly on cap gains if those gains are over a set dollar amount, $1000 IIRC, and assuming the taxes aren't covered by other withholding. At the end of the first year of having a trading account and being retired (no withholding from wages), I ended up paying a small penalty for not paying estimated for Q3 that year. Didn't matter that I offset that Q3 gain with losses in Q4 for about net $0 gains on the year.

IIRC, the IRS lowered the % required tax coverage from 90% to 80% for tax year 2020, so I'm not sure if that also changes the quarterly threshold for cap gains

Also, if I understand your scenario correctly, you do not have what is considered a wash sale as you sold your stock for a gain, not a loss. If you had sold for a loss, then bought the stock at a lower price within 30 days, the loss would be disqualified.

Of course I am not a tax professional (yet, considering it as a part time gig) so make sure you do your own research or talk to a tax pro.

[Doug Dawson]

One thing I learned the hard way (though not too costly of a lesson) is that the IRS expects you to pay estimated taxes quarterly on cap gains if those gains are over a set dollar amount, $1000 IIRC, and assuming the taxes aren't covered by other withholding.
Lest anyone here start woofing their cookies, capital gains are only (potentially) taxable when they are _realized_, i.e. when you sell them, cash them out etc. Moreover there are complications such as offsets by losses, which can be carried over from previous years. This quickly gets into the weeds, which is why we have giant books and tax pros to consult.

[Jim Koepke]

Lest anyone here start woofing their cookies, capital gains are only (potentially) taxable when they are _realized_, i.e. when you sell them, cash them out etc. Moreover there are complications such as offsets by losses, which can be carried over from previous years. This quickly gets into the weeds, which is why we have giant books and tax pros to consult.

One rule about rules is there are almost always exceptions to rules.

One of these exceptions is some investments require the paying of taxes on gains not yet realized:


Zero coupon bonds are bonds that do not pay interest during the life of the bonds. ... In addition, although no payments are made on zero coupon bonds until they mature, investors may still have to pay federal, state, and local income tax on the imputed or "phantom" interest that accrues each year.

This is why the best advice for Bill is to get in contact with someone who knows tax law and especially investment tax law.

jtk

[Doug Dawson]

One rule about rules is there are almost always exceptions to rules.

One of these exceptions is some investments require the paying of taxes on gains not yet realized:


Thanks for that clarification! Some zero-coupon bonds, heh. Bonds are a deep subject. Look at your brokerage firm tax statements closely. Am I missing an eyebrow?

But for the vast majority of (such as stock) investments this issue wouldn’t come up.

[Jim Koepke]

Thanks for that clarification! Some zero-coupon bonds, heh. Bonds are a deep subject. Look at your brokerage firm tax statements closely. Am I missing an eyebrow?

But for the vast majority of (such as stock) investments this issue wouldn’t come up.

That is true Doug. My point is tax law can be confusing and down right tricky. That is why my first suggestion and continuing advice is to work with a professional who knows the maze.

jtk

[Wade Lippman]

Thanks for the responses. i learned from them that I made a mistake when I cashed out my stocks when the pandemic hit. I bought them back in a few months after they bottomed out so I did make money that way. If I sell them now I would have to pay income taxes on the gains which will also push any long term sales into a higher tax bracket.
For my situation it looks like it will be a good idea to use the stock as collateral to get a loan to buy the new house. Then pay off most of the loan when we sell the old house and wait a few months until the stocks go long term to sell them to pay off the rest of the loan. Paying about 8% annual interest for a few months is better then paying about 30% in Federal + state taxes.
Bill D

My friend's daughter is an account for a national tax firm. I will talk to her to make sure. My Schwab brokerage office is closed for the duration and I needed an answer before new years. That is why I asked here to get some background so I had some idea what to ask her.

I came into some money in 2009 and bought my stocks at market bottom. Now they all have unrealized capital gains of well over 200%, so I had to ignore the pandemic as I couldn't sell anything without a huge tax bill. It worked out well. Hopefully I leave it to my children and no one will ever pay taxes.

Still, unless you plan on holding the stock for years you will have to pay taxes eventually, probably at an even higher tax rate. I can't see taking out a loan.

My niece is a partner at a major accounting firm. I have stopped asking her tax questions because she doesn't know anything about personal taxes; just corporate. Maybe your friend knows about personal tax.

[Jim Koepke]

I couldn't sell anything without a huge tax bill. It worked out well.

Wouldn't your taxes be a percentage of the gain taxed at a rate less than regular income?

My understanding is a normal sale of the stock would pay more than the taxes owed. Is something missing from my understanding of buying and selling stocks?

jtk

[Bill Dufour]

Jim. short term capital gains are taxed at the same rate as ordinary income. Long term capital gains are taxed at 0% if income is below 80,000. 15%. 80,000-496,000, 496,001 or more maxes out at 20%
The income tax rate would be 10%-35% in that income range.
Bill D.
PS: those brackets are for married filing jointly

[Jim Becker]

Bill, although I haven't commented on this thread previously, I'll mention that I've been giving a bit of thought about "what comes next" for Professor Dr. SWMBO and I relative to our home/property and part of that is how best to handle things financially and functionally. We will likely be looking more seriously at "downsizing" in the next year or two because our older daughter is already living independently in town (special needs adult) and our younger daughter is in her last semester at Penn State and will also likely be leaving the nest...she's already spending more than half her time at her serious boyfriend's parents' house nearby...meaning we have two adults and three small birds inhabiting a 4200 sq ft house on almost four acres for most of the week. I'm retired (early fortunately) and while The Professor will continue teaching until at least age 65 (3+ years away), she's teaching from home anyway at this point. We love the property, but are loving the upkeep even less as time passes...

Ideally, I'd like to find the "next property" first and buy it. That does several things, including taking a home sale contingency away which is a benefit in the current seller's market, as well as allowing a commitment for the "right property" when it comes along instead of having to settle for something or having to rent if our current property sells before we find something appropriate. After all...we want an appropriate home within a somewhat defined area with a shop or ability to build a shop...not a huge number of choices each day for that! I've already ruled out taking money from my IRAs to facilitate pre-purchasing other than maybe some necessary cash for down-payment. The tax impact is more than I want to sustain. Even an "expensive" temporary loan is less expensive than the tax impact. I don't have any securities that where short or long term capital gains would come into play, but unless your tax situation puts you in that lowest area for long-term gains, a loan still looks better, even at a premium rate, if you can get qualified for one. My personal preference is a separate mortgage on a new property that I would pay off once equity is realized from sale of the current property, but I might not actually pay it off right away...tax factors again and the impact of a mortgage interest deduction. Everyone's situation is different for sure. I'm actually hoping the fact that I can make my income whatever I want it to be will help with getting approval for a pre-purchase mortgage for a second property.

Of course, the alternative for us is to pay folks to help with the upkeep and that may be the case with maintaining the landscaping other than the grass, at least in the short term.

[Bill Dufour]

Check this out for low maintenance yard. There is at least twice as much green in the front yard as it used to be when my MIL lived in that city. There are companies that will spray paint your gravel or dead grass so it looks new.
Bill D.

http://suncityscenery.blogspot.com/2013/01/oakland-raiders-football-fan-house.html

[Jim Becker]

The approximately 2 acres of lawn is easy and I have a ZTR. It's weeding the landscaping that's getting harder to do...I can't crawl around like I used to, so it means bending like I'm working a rice paddy. That's getting old faster than, um...me. :)

[Bill Dufour]

I it easy in California. If you stop watering the lawn will stop growing and die. problem solved.
Bil lD

[Jim Koepke]

I it easy in California. If you stop watering the lawn will stop growing and die. problem solved.
Bil lD

That doesn't work up here in Washington. We are getting close to four inches of rain this weekend and people are talking about how dry it has been this year.

That is a little known subsection of Einstein's Theory of Relativity. A bit north of me is an area of the state where less than one hundred inches of rain in a year could be a disaster.

When talking to folks who have lived up here much longer than me about people mowing lawns and yards after a rain they told me, "if you don't mow wet, you won't mow."

jtk

[Bill Dufour]

I will add that everyone should have a Roth IRA as soon as they turn 18. Once you own one for five years you can take out money and profits tax free if you are over 59+1/2. If you are under that age you can pull money for college or to buy a house with no taxes.
The IRA does not have to be 5 years old just that you had one with some companies for the 5 years. So you can switch companies with no tax penalty.
Bill D