Author Topic: Capital Gains Tax Timing  (Read 2800 times)

Jacob1234098

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Capital Gains Tax Timing
« on: July 29, 2014, 11:19:33 PM »
Say you have the following two scenarios:

Scenario 1 - you invest 100k and let it grow for 15 years. At the end of 15 years, you sell it and pay $7688.85 in taxes.
Scenario 2 - you invest 100k and let it grow for 4 years. You sell it and pay capital gains tax of $1882.63. You then invest it again in an equally performing fund and achieve identical gains for the remaining 11 years.

Who comes out on top? My calculations show that the results are more or less identical. Did I miss something? Did I not account for locking in a lower cost basis after buying new stocks after 4 years? Or am I right in that as long as you wait over a year to sell to lock in long term capital gains taxes, it doesn't matter when you sell after that, whether it is 2 years or 20 years?

1.03 interest/year
0.15 tax rate on capital gains

Scenario 1        Scenario 2
$100,000.00     $100,000.00    
 $103,000.00     $103,000.00    
 $106,090.00     $106,090.00    
 $109,272.70     $109,272.70    
 $112,550.88     $112,550.88     Scenario 2 opportunity loss
 $115,927.41     $114,044.78     $1,882.63
 $119,405.23     $117,466.12     $1,939.11
 $122,987.39     $120,990.10     $1,997.28
 $126,677.01     $124,619.81     $2,057.20
 $130,477.32     $128,358.40     $2,118.92
 $134,391.64     $132,209.15     $2,182.49
 $138,423.39     $136,175.43     $2,247.96
 $142,576.09     $140,260.69     $2,315.40
 $146,853.37     $144,468.51     $2,384.86
 $151,258.97     $148,802.56     $2,456.41
      
 $7,688.85        $7,320.38        $368.31
                                  $7,688.69    




Joel

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Re: Capital Gains Tax Timing
« Reply #1 on: July 29, 2014, 11:29:06 PM »
It all depends on your tax rate when you realize the capital gains...

sol

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Re: Capital Gains Tax Timing
« Reply #2 on: July 29, 2014, 11:52:41 PM »
google "tax gain harvesting" and read all about it.

milesdividendmd

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Re: Capital Gains Tax Timing
« Reply #3 on: July 30, 2014, 12:01:02 AM »
Say you have the following two scenarios:

Scenario 1 - you invest 100k and let it grow for 15 years. At the end of 15 years, you sell it and pay $7688.85 in taxes.
Scenario 2 - you invest 100k and let it grow for 4 years. You sell it and pay capital gains tax of $1882.63. You then invest it again in an equally performing fund and achieve identical gains for the remaining 11 years.

Who comes out on top? My calculations show that the results are more or less identical. Did I miss something? Did I not account for locking in a lower cost basis after buying new stocks after 4 years? Or am I right in that as long as you wait over a year to sell to lock in long term capital gains taxes, it doesn't matter when you sell after that, whether it is 2 years or 20 years?

1.03 interest/year
0.15 tax rate on capital gains

Scenario 1        Scenario 2
$100,000.00     $100,000.00    
 $103,000.00     $103,000.00    
 $106,090.00     $106,090.00    
 $109,272.70     $109,272.70    
 $112,550.88     $112,550.88     Scenario 2 opportunity loss
 $115,927.41     $114,044.78     $1,882.63
 $119,405.23     $117,466.12     $1,939.11
 $122,987.39     $120,990.10     $1,997.28
 $126,677.01     $124,619.81     $2,057.20
 $130,477.32     $128,358.40     $2,118.92
 $134,391.64     $132,209.15     $2,182.49
 $138,423.39     $136,175.43     $2,247.96
 $142,576.09     $140,260.69     $2,315.40
 $146,853.37     $144,468.51     $2,384.86
 $151,258.97     $148,802.56     $2,456.41
      
 $7,688.85        $7,320.38        $368.31
                                  $7,688.69

If Stocks simply went up continually, and never went down (as in your scenario), there would be no point in tax gain harvesting.

But Stocks go up-and-down (fortunately up more than down) and so the purpose of tax gain harvesting is to lock in a higher basis so that when the stock goes down you can claim a bigger tax loss.

As Joel points out, tax gain harvesting only really makes sense if you do not have to pay taxes on your gains in the first place (i.e. you are in the 15% tax bracket or less), or if you anticipate paying a lesser tax rate on the gains now than you will in the future.

As usual, the best writing on tax strategy in early retirement comes from the mad fientist.

http://www.madfientist.com/tax-gain-harvesting/

Enjoy.
« Last Edit: July 30, 2014, 12:09:03 AM by milesdividendmd »