Make a Plan for Realizing Investment Gains

 | Dec 04, 2012 | 11:00 AM EST  | Comments
  • Comment
  • Print Print
  • Print

Last Friday, we wrote about the considerations concerning whether to offset previously realized 2012 capital gains with available losses. Our perspective was that, barring an announcement that capital gains rates would rise to 30% or higher, you should use available losses to offset 2012 gains.

Today, let's look at the flip side of the issue: Should you take unrealized gains as taxable profits in 2012? The considerations are whether to pay up sooner at a lower tax rate, as opposed to paying later at a higher rate.  

As is true of so many things, the correct short answer is, "It depends." The expanded answer is that it largely depends on your own circumstances.

As we stated last week, we believe that capital-gains rates are likely to rise incrementally but not dramatically. Our best sense is that rates will rise from the current 15% to a rate of 20% and possibly even 25%. (On top of this will be the new health care law surtax of 3.8%, which will apply to all forms of investment income except those generated by an actively managed business.) So rates are likely to rise to the 23.8% to 28.8% level. 

We all hope to have some clarity on capital-gains rates before Dec. 31, but you should set a general plan now and be prepared to act on an eventual tax and budget agreement. In the absence of definitive details, we believe the best working assumption is that capital gains rates will move up to the 23.8% level (20% plus the newly effective health care surtax).

All of this leads to a consideration of the time value of money, i.e., the differential between paying less tax sooner rather than the discounted value of paying possibly more tax in the future.

However, we believe the two most important factors should be your own needs for cash and your view of the investment merits of the particular stocks that you might sell for gains.

If you think you will need cash next year, it would probably make sense for you to take gains in 2012. The amount of gain to be realized should track your need for cash, including the tax required to cover the realized gain. Therefore it's not necessarily an either/or decision. You can take gains just to match your cash-flow needs.

Conversely, if you aren't in need of cash next year, then it probably makes good sense to hold on. This would be particularly so if you have a conviction that the stocks in question have good prospects. If a stock is close to hitting your targeted sale price purely from an investment consideration, and if you expect to sell it between now and early 2013, you might consider taking a portion of the gains in 2012 and the balance next year.

Another factor arguing for holding on would be that, while you might have a gain in a stock, there might be some continuing year-end selling pressure as other investors attempt to realize gains on the same stock as well. In 2012, year-end tax selling pressure might fall upon both winners and losers.

The bottom line from our perspective is that barring your needs for cash, making investment-driven decisions about selling is probably the wisest course.

So the combination of investment considerations, together with the benefit of being able to pay tax later, should provide, in the absence of a need for short-term cash, a strong inducement to hold winning stocks that you continue to like into 2013.

Columnist Conversations

Lang:
We waited a bit on this one but still banked a nice winner. SOLD AAPL MAY 525 CALL AT 41.65 (in at 12, so 247%...
No slowdown in cyber attacks and using the pullback to add to the KEYW position at Thematic Growth
General Electric dipped down to key nearby support during the early stock sell off. GE filled the high v...
Apple (APPL) has been trading for over a year within the parameters of a set Fibonacci retracement levels. The...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.