Selling Your Winners: Tax Strategies

What are some strategies for selling your winning equities? If you have highly appreciated equities, what should you do with them, considering tax strategies?

It is a common problem, as people sell their losers and hold their winners. Many have invested in some winner stocks and have outsized gains to deal with or have been investing long enough that they want to get rid of highly appreciated equities.

Let’s look at some tax strategies for your winners.

It’s a Matter of (Low) Basis: The Definition of Highly Appreciated Equities

Highly appreciated equity strategies involve stocks with a low basis. A low basis means it costs less when you buy it than now. Since it has appreciated, when you sell it, you will owe long-term capital gains on the appreciation between the basis (price you purchased it at) and the current price.

The basis is the purchase price. Your winning stocks are highly appreciated. Taxes are due when you sell.

So, what should you do with highly appreciated equities? First, what do you need to do anything?

What If You Lost It All?

Let’s assume you have a concentrated stock position and don’t want to pay taxes to diversify the position.

Well, what if you lost it all? Sometimes, paying taxes is better than over-concentration.

You get wealthy through concentration and stay wealthy through diversification.

Now, some have concentrated positions in their brokerage accounts after dabbling in stocks. If you need that money to retire, be careful and honest with yourself. You may have created wealth through concentration. Now it is time to diversify: take some money off the table. Recognize the gains, pay the taxes. Diversify. Move on.

It is time to diversify if you can’t afford to lose it all.

How might you do that? Next, let’s look at some strategies for diversifying highly appreciated stocks.

Tax Strategies for Selling Winning Stocks

Here are some tax strategies for selling winning stocks:

• Hold them until you die and get a step up in basis for your heirs
• Donate them to charity or your DAF
• Use a CRUT for current or future income
• Upstream Gifting (give them to your parents to get a step up in basis at death)
• Downstream Gifting
• Hedge via put options or collaring (will get expensive if everyone is doing it)
• Tax Loss Harvest like crazy
• Bite the bullet and sell some now and the rest later – pay the taxes and move on!
• Sell yearly up to an optimal capital gains bracket
• Lose capital on Oil and Gas, or invest in Conservation Easements because you enjoy lawsuits
• Sell on a year you otherwise have a significant deduction
• The best strategy for diversifying winning stocks may be directed indexing

Let’s investigate some of the above strategies for highly appreciated stocks.

Specific Tax Strategies for Selling Winning Stocks

Charitable Bunching and DAFs

Given the high standard deduction, it is best to bunch charity into every other or third year.  Giving away your highly appreciated stock to charity is a great way to re-set the basis. Consider a Donor Advised Fund (DAF). Use the cash you would donate to buy stocks at today’s higher basis, and give away the low-basis stock that the charity can sell tax-free. Win-Win. Some call this flushing out gains. I have a blog you might want to check out on optimal giving to charities.

Optimizing Capital Gains Tax Brackets

Remember that capital gains stack upon ordinary income. There is a parallel, and some would say evil taxation system for capital gains. Breakpoints to consider: the top of the 12% ordinary bracket (where you can capital gain harvest and pay no taxes), up to the top of the NIIT surcharge (250k married, 200k single), and up to the top of the 15% (or more accurately when 18.8% becomes 23.8% including NIIT) bracket. This 15% to 20% capital gains transition is near the top ordinary marginal tax bracket (currently 37% but soon 39.6%). See why I called it evil?

The idea is to figure out your next breakpoint and then sell enough of the low basis stock to fill up your current capital gains bracket. This could save you 15%, 3.8%, or 5% on taxes and is worth looking into every December with your CPA if you have highly appreciated stocks. Evil.

CRUT into DAF

Finally, I like taking a ton of highly appreciated stocks and turning them into an income stream. With an irrevocable transfer into a charitable remainder trust, you can sell the low-basis stock and diversify your investments tax-free. You get current income (or future income—these can be pretty nice given low current interest rates), which is taxed at capital gains rates. You also get a nice tax write-off the donation year, which means jumbo partial Roth Conversions that year. Of course, see your qualified estate attorney for trust and tax advice. Or, if you don’t care what happens to the remainder, visit your favorite local charity, university, or hospital. They will happily set up a gift annuity for you.

With a CRUT, think about leaving the remainder to your children’s DAF. They can donate the remainder during their lives, saving them money as they can spend theirs and donate yours—a CRUT into DAF. Brilliant move today for highly appreciated stocks if you want income, a present-day write-off, and future charitable donations for your children.

The Best Highly Appreciated Stock Strategy: Direct Indexing

Direct indexing is taking the investment industry by storm and is the best highly appreciated stock strategy. I suggest you get familiar with direct indexing and learn about the pros and cons.

Direct indexing has existed for a few decades but is now more accessible to individual investors. Technology, fractional shares, and feeless trading of equities bring direct indexing into the present.

Index-based ETFs are the gold standard in investing. They are inexpensive, diverse, and very tax-efficient.

Direct indexing must be pretty special to beat a portfolio of 2-6 ETFs in a brokerage account. What is direct indexing?

 

Tax Strategies for Selling Winning Stocks

Many people have done exceptionally well with individual stocks as the tide has risen. However, the tide will not rise forever, and Apple and Tesla will eventually drop in price. Remember, stocks are more risky the longer you hold them.

Do you want to hold them until you die and get the step-up? What if that was your strategy with GE, Sears, Kodak, Enron, or more than half of the Dow Stocks from 20-30 years ago? Your children would not be happy with the result.

Holding the S&P 500 or a Total Market Index fund is a much better long-term idea. If capital gains go to zero, we will have more significant problems than taxes.