What's the point of of a LT Capital Gain?

[Breand]

Can one of you explain what the advantage of this is?

One of my main mutual funds just did a capital gain of LT CAPITAL GAIN 4.2345. So the stock has come down to that level and then repurchased stocks at the new level. But of course, the value of the investment has not changed. Yet this is now something I have to pay tax on.

Why do companies do this?

[Grieve]

Long term (LT) capital gain is only taxed at 15% (for now). Short term is taxed as income. If you got a long term payout, it's either because they sold some long term holdings, or a stock they hold paid out a dividend. Quite possibly special dividends before the fiscal cliff. They have to pass the cap gains onto you, it's the law. Best to avoid buying just before a distribution (you can research when they are).

I believe this is offset when you sell the fund later.

[Breand]

I did get a dividend at the same time.

Just seems odd to me, that I have to pay tax on something I made no money off of....I understand taxing the dividend, but why tax what is really just a reassignment of stock price? I basically just own a greater number of diluted shares.

[Vanraw]

What Grieve said. It depends on the class of mutual fund you have as well as far as rules of engagement on fees and taxes. i will say that there are too many people playing these games prior to the cliff knowing there is going to be a tax hit on capital gains. I get why they are doing it, but it just stinks of sleazy loop hole manipulation.

Just be glad you will pay 15% I guess.

[Grieve]

I did get a dividend at the same time.

Just seems odd to me, that I have to pay tax on something I made no money off of....I understand taxing the dividend, but why tax what is really just a reassignment of stock price? I basically just own a greater number of diluted shares.

What really sucks is when you buy a fund at $100 a share, then it drops to $50 a share (e.g. 2008), but you still have to pay up for a big cap gains payout. It based on whether they sell a holding, not whether you made money on the fund itself.

For example, they buy AAPL at $100 in 2008. Apple rises to $700. You buy the fund at its peak, for $50 a share. There's a market selloff, and AAPL falls to $400 and the fund falls to $25. Because of redemptions, they decide to sell their AAPL to raise cash. Even though your fund shares already halved in value, you still get a cap gains payout on the AAPL sale (which they made $300 per share on) and have to pay tax on it.

Not a problem if your funds are in an IRA or 401k, of course.

[Slamz]

If I understand it all correctly, it's something I think everyone should think about in their privately held stocks. Anything you have that's gone long term, you might want to sell it now and rebuy it, rolling all your profits back in.

Maybe an attempt at an example is in order... You bought 100 shares of stock at $50 and it's now a LT holding at a stock price of $100.

2012: 100 shares of stock @ $100 each = $10,000 minus $5,000 initial cost minus 15% tax = $4250 actual value
2013: 100 shares of stock @ $100 each = $10,000 minus $5,000 initial cost minus 30% tax = $3500 actual value

If the tax rate goes up to 30% (I don't think we know what it's going to move to yet, other than it's not gonna go down...) then by doing nothing, you would have just lost $750. By selling in 2012 and re-investing, you actually came out ahead even though you had to pay taxes and didn't actually end up with any cash in hand from it.

[Grieve]

I 100% agree (not often I say that to Slamz... :lol. What strikes me as surprising is that some people/funds seem to selling but not rebuying right away. Possibly they are waiting for Jan 1st - that's my hope.

[Vanraw]

yea agree Slamz. If you have non tax deferred LT equity, Mutual funds or ETF's you can lock in the gains for less tax (assuming thats how Capital gains looks like after the cliff. Just careful on what you buy back if you take a loss and on how it applies to the Wash rule.

[Grieve]

If you'd be taking a loss there's no need to sell (unless you want offset gains, I guess).

[Vanraw]

If you'd be taking a loss there's no need to sell (unless you want offset gains, I guess).

Yea its a different subject but now is the time to lock in losses as well.

[Breand]

So by Slamz reasoning, wouldnt everyone do that the second the government jumps the cliff causing a HUGE market selloff?

[Grieve]

People have already been doing it on stocks up a lot, like AAPL and GOOG, that they have held for over a year. I guess you might get a final splurge on the 31st. I don't think it's worth buying TZA in anticipation, thought, in case there is a final gasp deal on the cliff.

[Slamz]

So by Slamz reasoning, wouldnt everyone do that the second the government jumps the cliff causing a HUGE market selloff?

I think the sign would be gigantic market volume with little change in price. It's a huge sell-off but it's also a huge buy-in, assuming people are doing mainly what I said, which is sell and then rebuy. Or it's like someone else said, and they are selling off and staying in cash, perhaps in anticipation of a huge sell off...

I wonder if we could see a stock market crash mainly driven by fears--actually "hopes"--of tax concerns causing a sell-off. Everyone will be getting into cash hoping to see a crash so they can get back in.

[Vanraw]

I wonder if we could see a stock market crash mainly driven by fears--actually "hopes"--of tax concerns causing a sell-off. Everyone will be getting into cash hoping to see a crash so they can get back in.

That's where I am. Ive actually shorted the market. but I'm mainly cash.

The thing that is interesting right now is that all the signs are in for a really strong run. From housing starts to CPI to Better then expected GPA and employment numbers. Plus last earning season was not to shabby. We are in for a good strong run once this cliff nonsense gets settled.

[Breand]

Anyone know how I handle this when figuring out my cost basis for taxes? If I have a mutual fund that say was $20 and did a cap gain that set the value back down to $16 do I base my sale on the $16 or do I need to somehow account for the $20 value?

[Snowreap]

I think you handle it differently depending on whether it's an IRA or a 401(k), or whether it's just a regular non-retirement investment account. my knowledge only applies to retirement accounts.

-ken

[Breand]

yeah it's a non retirement. always a pain to figure out because there were monthly purchases for years.

[Breand]

Well this is balls. After what I'm going to have to pay in taxes on that capital gain I am now on all the rich people's side that there should be no capital gains tax.

[Vanraw]

lol

I always tell people I love paying capital gain taxes. It means I made money.... But I know what you mean.

[Breand]

lol

I always tell people I love paying capital gain taxes. It means I made money.... But I know what you mean.

Yeah but it's basically "I made money over the span of 8 years but have to pay taxes on them all at once!"

[OrsunVZ]

Do you get a refund for Capital Loss???

[Grieve]

No, but you can carry it forward to future years to offset any gains.

[Vanraw]

Do you get a refund for Capital Loss???

No, but you can carry it forward to future years to offset any gains.

Yea, your losses can offset any gains you made in that year. If your losses are greater then you gains, then you can deduct 3k as a loss. anything over the 3k can rollover to the next year / future years.

I understand why the rule is there, but it always seemed unfair. If someone made 100k in gains, its all taxed. If you loss 100k, you can only deduct 3k.