The Day After Apple and Taxes

[dragonwalker]

So about 6 years ago I bought and sold Apple shares and I ended up holding 250 shares at a cost basis of about $81 or about $20,000. I've seen Apple currently grow to about 530% of my original investment if I assume it will hit $500 per share that's $125,000. I don't know about you guys but that was much more than I could ever imagine in such a short time it could grow to. I am grateful that I have this money on paper but that's just the thing. Everyday I see it climb higher I sometimes feel more concerned about losing it and ironically maybe even worse when it was down on its lows.

The majority of what I have is in VSTAX and equivalents but Apple represents the largest single stock I hold by far partly because it's growth has just been outstanding and I haven't added a dime to since 6 years ago. At it's currently it's about 25% of my net worth which is enormous. I've been hearing some people who track Apple fundamentals say it's overvalued but is that evidence very solid? Fundamentals aside who really knows the future development path of Apple and there is so much optimism built around this upcoming split that I don't want to miss this opportunity but I don't want to sell when I have a chance to.

A few concerns though can someone give me some rough guidance if I did want to sell what I should limit my gain to to pay the least amount in taxes? My base income and fixed income from dividends only comes to about $60K and I live in CA. I am not a homeowner and a single individual. Also I have no need for the money so if I did anything it would probably all go to VSTAX but is that a wise thing? If I did sell a portion or all I'm just left with a large tax bill. Is the transferring of Apple to VSTAX make sense this way to mitigate risk? I believe Apple is also in no small number in VSTAX as well. I just want some pros and cons from the experience of people on here. This would be the first time that I could be realizing such a large gain and I want to do this correctly.

I will say even though there is nothing right now I need it for one big potential I've considered is a potential housing market crash that might send prices plunging and perhaps make is reasonable to purchase my own home. It always been a goal of mine but with home prices in the Los Angeles area they are just to high or I just don't see the value in doing it. I've thought maybe if I cash out of Apple now in the event of a crash I won't lose my investment as well not that Apple or VSTAX is necessarily correlated with the housing market but I would at least have that cash. Am I making sense here?

[waltworks]

If you have a 401k and tIRA going, and you're not already maxing your contributions to those things, you can sell some stock, and use the proceeds to fund them. It's not too hard to get up over the standard deduction that way and hence you can probably zero out any increased taxable income (you'll need to run numbers to figure out how much stock you can sell per year, of course).

Otherwise, if you want to sell it all now, there's no way to dodge the LTCG.

-W

[terran]

As a single filer with $60k of other income you're already about $8k over the 0% long term capital gains bracket, and about $390k below the top of the 15% bracket, so I'd probably sell it all now since anything you can get down into the 0% bracket would still be quite a small amount, so you're pretty much stuck with the 15% bracket for the most part.

As waltworks says, assuming you have earned income, if you have a workplace retirement plan contribute the max to that, and if not contribute to a traditional IRA (no income limit if no workplace plan). Since you're so close to the 0% LTCG bracket any contributions will not only reduce the tax on your earned income, but any long term capital gains or qualified dividends you can under the bracket will save another 15% giving you a 25-27% marginal tax savings (depending on the split between earned income and dividends in your normal $60k income).

[Financial.Velociraptor]

Are you comfortable with options?  You could collar the position to earn a yield of a few percent while closing off your downside risk.   You'd give up additional upside above the short call strike and be forced to sell at that strike if it was exceeded at time of expiry.  Also, options contracts are for lots of 100 shares.  You could collar 200 shares with two spreads but the other 50 shares would be fully exposed to the market.

[ChpBstrd]

Are you comfortable with options?  You could collar the position to earn a yield of a few percent while closing off your downside risk.   You'd give up additional upside above the short call strike and be forced to sell at that strike if it was exceeded at time of expiry.  Also, options contracts are for lots of 100 shares.  You could collar 200 shares with two spreads but the other 50 shares would be fully exposed to the market.

Stole my thunder.

Another way to put some limits on your risk and to better balance your AA would be to sell calls on your AAPL, collecting cash in hand until the stock drops a bit and the shares are assigned away. Then you take the money and buy an index fund.

However, either of these approaches has the potential to trigger taxable gains, as does simply trading the shares. You don't mention if this is in a taxable account or IRA. If taxable, I'd be more reluctant to risk the capital gains and might just let it ride until this new tech bubble gets ridiculous.

[dragonwalker]

I'm not comfortable at this doing in anything but holding stocks long. I don't understand the other market options well enough to act on them. Yes this is a taxable account so there is that but when exactly does it get ridiculous? It's incredible I would have considered an 8% return quite fortunate and over 6 years would have total gross value about $35K now it is 4 times higher than what I thought would be excellent...when do I pull the plug? Ironically many people have said the last few years I have to much in Apple but it just keeps on going.

Another irony is even with this huge gain I still can DO NOTHING with it. Not like it makes any huge difference for home purchase. I had the cash anyway to put what I'm comfortable with. It's like it's sits in this high risk environment because I have no plan for it other than to gamble and see how high it grows. 

[Rdy2Fire]

I like the ideas some threw out on the options. However, since you don't seem interested in that, I'd consider just holding it.

Coincidentally I also own Apple shares and mine are at a cost basis of $88. Although I could be looking at selling them, like yourself, I'm actually considering buying more during the typical post split dip (time will tell if that happens).

Although I do agree with some, that Apple is over valued, with the expansion of their video/streaming offerings and 5G inevitably coming they will continue to have great earnings in the future and the stock will continue to go up (overtime). Without any other consideration, think about how many 4G Iphones are out there and Apple users (I'm not one) are all about the next/newest product.

[The Hin]

I was in a similar boat myself (until quite recently). My portfolio was nearly all index funds, with the exception of a chunk of AAPL I bought years ago. After the recent massive run-up in share price, AAPL had become about 1/3 of my liquid net worth. As much as I respect Apple as a company, the stock looks to be overbought... and I have clear memories of past years when AAPL got beaten down even while other tech names did not. That said, I couldn't bring myself to just sell the shares. It's hard to sell winners!

At any rate - I landed on a strategy of selling out-of-the-money covered calls, figuring that the incentive of getting some cash up front in exchange for agreeing to give someone the opportunity to buy my AAPL if the price went up even more would be enough for me. So I sold some $460 Sep 21 calls when AAPL was around $445... and the stock ran up to around $460. So I figured hey, let's do some more, and sold covered Sep 21 calls on the rest of my AAPL at $480. Sure enough, the stock finished around $500 last week all the calls were exercised.

I spent some time this weekend feeling sorry for myself that I had sold the calls - after all, I would be about $20,000 richer if I hadn't done so. At the end of the day though I'm a value investor, selling AAPL was the right thing to do, and I sold the covered calls as part of a principled plan intended to give me a good exit on the AAPL shares one way or another. In fact, if I hadn't sold AAPL calls before I would do it now.

[waltworks]

If you really don't want to pay capital gains, and you don't want to do the tIRA/401k loading strategy, the only way to pull it off will be to wait until RE, then sell chunks small enough to keep you under the income threshold.

IMO starting with the tIRA/401k now would be a great idea.

-W

[Rdy2Fire]

I was in a similar boat myself (until quite recently). My portfolio was nearly all index funds, with the exception of a chunk of AAPL I bought years ago. After the recent massive run-up in share price, AAPL had become about 1/3 of my liquid net worth. As much as I respect Apple as a company, the stock looks to be overbought... and I have clear memories of past years when AAPL got beaten down even while other tech names did not. That said, I couldn't bring myself to just sell the shares. It's hard to sell winners!

At any rate - I landed on a strategy of selling out-of-the-money covered calls, figuring that the incentive of getting some cash up front in exchange for agreeing to give someone the opportunity to buy my AAPL if the price went up even more would be enough for me. So I sold some $460 Sep 21 calls when AAPL was around $445... and the stock ran up to around $460. So I figured hey, let's do some more, and sold covered Sep 21 calls on the rest of my AAPL at $480. Sure enough, the stock finished around $500 last week all the calls were exercised.

I spent some time this weekend feeling sorry for myself that I had sold the calls - after all, I would be about $20,000 richer if I hadn't done so. At the end of the day though I'm a value investor, selling AAPL was the right thing to do, and I sold the covered calls as part of a principled plan intended to give me a good exit on the AAPL shares one way or another. In fact, if I hadn't sold AAPL calls before I would do it now.

I've had this exact situation happen in the past with another stock. I kicked myself a bit as well but then thought that given it was "a winner" I did well with it and didn't lose confidence in the company, bought a new position. Obviously, now that you locked in some profits, in a week you can do the same, a a lower entry point, or just move on to the next one :)

[marty998]

If you really don't want to pay capital gains, and you don't want to do the tIRA/401k loading strategy, the only way to pull it off will be to wait until RE, then sell chunks small enough to keep you under the income threshold.

IMO starting with the tIRA/401k now would be a great idea.

-W

I wa storing to suggest sell over two tax years to spread the damage...

[seattlecyclone]

Do you do any charitable giving? Appreciated stock is the best thing to give away because you don't pay capital gains tax on it and you get to deduct the current market value. You could even start up a donor advised fund to pre-fund several years' worth of giving and avoid the capital gains tax on your winnings all at the same time.

[CCCA]

Very timely post as we have something of the same issue with cost basis about 90.


I know you said you didn't want to do options, but one thing I've been thinking is to lock in gains and potentially shift some of the gains from a taxable to non-taxable account (Roth).


I think you just keep AAPL in the taxable account and buy put options in your non-taxable account.  Then IF apple declines, you lose some of your gains in the taxable account but then you are getting gains in your non-taxable account.  It's not a perfect method as put options have a premium associated with them and expire at some point. But it might be a way to reduce taxes.  If apple continues to climb, you'll lose your premium on the put options (and lose capital in your Roth) but you'll have more AAPL gains with even more taxes owed so not a terrible outcome either.


On the tax front of liquidating your shares, minimizing taxes depends on your tax rate.  My tax calculator might be of use to see what % you'll pay on long-term capital gains.


https://engaging-data.com/tax-brackets/

[Proud Foot]

On a per share basis you will still have the same capital gains but the split will now let you lower the total amount of capital gains you recognize as you sell. This can help you slowly lower your allocation in AAPL without having to recognize as large of a capital gain at a time.

If you haven't already you should make sure your dividends are not set to reinvest and then you can purchase into an index fund when they are received.