Capital gains taxes

[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