Many investors are now on the fence as to what to do with their unrealized capital gains. On one hand, investors are attracted by the chance to only pay 15% on long-term capital gains as opposed to 20% or 23.8% in 2013. On the other hand, investors that sell now will still have to pay a tax instead of deferring it to later years, unless of course they’re in the 15% tax bracket or lower. What should you do?
The capital gains tax landscape for 2013
Starting in 2013, long-term capital gains taxes are set to rise to 10% for those in the 15% marginal tax bracket and up to 20% for everyone in higher tax brackets. Plus, if you earn over $250,000 as a joint filer or $200,000 as a single filer, your investment income could be subject to the 3.8% investment income surtax. Thus, high income earners could be paying 23.8% in long-term capital gains, up from 15% in 2012.
Should you realize your capital gains now?
The tax savings on long-term capital gains could be 5% and 8.8% should you be subject to the new investment income surtax in 2013. The strategy that many investors are employing now is to sell their positions and lock-in the lower capital gains tax rate and then buy back the same shares as if they never sold the position. For instance, if you own 1,000 shares of McDonalds, which was originally purchased at $60 and plan to sell it today at $90, you can purchase it back now or wait for it to fall to lock-in the lower capital gains tax rate. The sale will result in a $30,000 long-term capital gain since there was $90,000 in proceeds and a cost basis of $60,000. By selling now, you would save 5% or $1,500 in taxes with all things being equal. The downside to selling now is that you’ll still be paying taxes of $4,500.
Should I stay the course?
It depends on your time horizon for the investment. If you plan to sell out of the position anyway by the end of 2013 or 2014, then it may make a lot of sense to sell in 2012 to save 5% to 8.8% in capital gains taxes. If you plan to hold the position for five years and beyond, then deferring your tax payment to later years even at a higher tax rate could be more beneficial to you. For instance, the $4,500 in taxes you would be paying this year in the above example could have continued to appreciate in value should you not have sold in 2012.
More Questions? Browse Answers or ask your capital gains tax questions online.
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