Capital Gains Questions

[SecondEngineer]

Hi everyone, I understand how capital gains taxes work in the simplest of examples, but I have questions about how it will apply to my individual case.

Say I invest $1000 per month in a taxable account holding VTSAX for 10 years. At the end of these 10 years I have invested a total of $120,000. The value of VTSAX has fluctuated and I have bought shares at different values over the years. Say the account is now valued at $180,000. If I were to sell shares(using shares to refer to mutual fund shares), how do I determine which shares I am selling? If I sold shares I bought when I first started investing the difference between those share prices and the current price would be pretty large and incur a large capital gain tax, right? While selling later shares would result in smaller capital gains tax.

Also, if I'm selling below a certain amount would that mean I don't have to worry about capital gains taxes at all? If I make no income and sell $20,000 worth of VTSAX, won't that likely be in the 0% capital gains tax bracket? Would this still be the case if my income were, say $20,000? What about if my income were $37,000? (From what I've read the 0% capital gains bracket right now is $0-$38,600).

From what I've read on the forums it seems like avoiding capital gains taxes is a big talking point. Is it only a big deal for those who are spending a good amount per year? It seems like it shouldn't be a problem for anyone who can cut their spending below $40,000 or so.

Thanks!

(I just realized this topic might be better in the taxes section?)

[Aggie1999]

Vanguard and other brokerages default to average cost basis. You can change the account to specific lot cost basis (named different things depending on the brokerage). Then you can sell specific lots (i.e. the newer ones with less growth). Note that Schwab will not allow you to change the cost basis method on previous purchased lots. Why? I don't know. Vanguard and Fidelity will retroactively apply the cost bases method to previous purchases like any good brokerage should.

[SecondEngineer]

Vanguard and other brokerages default to average cost basis. You can change the account to specific lot cost basis (named different things depending on the brokerage). Then you can sell specific lots (i.e. the newer ones with less growth). Note that Schwab will not allow you to change the cost basis method on previous purchased lots. Why? I don't know. Vanguard and Fidelity will retroactively apply the cost bases method to previous purchases like any good brokerage should.

Thanks, that was very helpful! I was able to find my cost basis info on Vanguard and I feel like I better know what is going on now.

[Davnasty]

Don't forget state taxes on capital gains. Not all states tax CG, but most do and the states I'm familiar with tax it as regular income.

[seattlecyclone]

Don't forget state taxes on capital gains. Not all states tax CG, but most do and the states I'm familiar with tax it as regular income.

Also ACA subsidies if you're planning on buying your health insurance through the exchange. Even though capital gains income has a 0% tax rate it still counts toward your MAGI that is used to determine your subsidy. Depending on your income level this could amount to as much as a 9.5% tax on this supposedly untaxed income.

[MissNancyPryor]

Old thread, I know, but I do have a question that aligns and rather than start a new thread I will add to this one. 

I have a pile of money in a growth fund at Vanguard and it has a higher turnover than VTSAX.  It is held in my taxable brokerage account rather than retirement and the once-annual gains are reinvested.  In the past I paid taxes on them with the usual income even though I didn't bring it home; in the future I may have all dividends and gains just dumped into my bank account for spending.

Now that I have FIRED and am on the ACA I am trying to guess what the gains might be so I can declare this along with dividends as my expected income.  This is very difficult to determine though.  I see what Vanguard is saying the realized and unrealized gains are so far for this year on the fund's detail page.  Last year's number was very large apparently due to the overall weak year and the December panic (? or something).  They do not provide detail on what it was in prior years so I am left guessing what it might be for Dec 2019 as well as in the future. 

Any tips on how to know what to expect so I can try to nail down that income?

Also, a smaller question-   is it smarter to leave gains and dividends in the account for automatic re-investing (deliberately selling shares only if I need to raise spending cash) or should I just send it all home as it shows up? 

[seattlecyclone]

Any tips on how to know what to expect so I can try to nail down that income?

At some level, you just have to guess. Maybe take a look at the income per share the last few years and guess a similar number, maybe erring on the side of underestimating if it will make a difference which cost-sharing bracket you'll end up in.

Also, a smaller question-   is it smarter to leave gains and dividends in the account for automatic re-investing (deliberately selling shares only if I need to raise spending cash) or should I just send it all home as it shows up?

I have dividends from my taxable account sent straight to checking. My funds pay dividends quarterly and the amount tends to be about enough for the next month's spending. Seems more straightforward to do this rather than reinvest them and then sell more shares within a week or three.

[seattlecyclone]

Don't forget state taxes on capital gains. Not all states tax CG, but most do and the states I'm familiar with tax it as regular income.

Also ACA subsidies if you're planning on buying your health insurance through the exchange. Even though capital gains income has a 0% tax rate it still counts toward your MAGI that is used to determine your subsidy. Depending on your income level this could amount to as much as a 9.5% tax on this supposedly untaxed income.

I have to amend this statement based on the discussion in this other thread. Turns out that while the percentage of MAGI you pay for insurance (the second-cheapest silver plan) will never exceed 9.86% below 400% of the poverty level, the marginal rate you pay on income in the form of ACA subsidy phaseouts can be higher than 15%.