Investing agility and taxes

Investment Analysis Clubs Saul’s Investing Discussions
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One of the things I admire about Saul’s investing strategy is that he’s very agile. He doesn’t fall in love with a company. When a company’s fundamentals change, he trades out and into something better.

But, for those of us who are trading in taxable accounts, we need to keep taxes in mind. Let’s take an example of two stocks: GOOD (not Gladstone, btw) and BETR.

In the first 9 months of Year1, GOOD’s price increases 50%, but then its growth slows and during the next 9 months, its price will only increase 25%. BETR gets on this board’s radar in late Sept of Year1, and it looks to be a stunner. Its price will increase 50% over the next 9 months.

Now imagine two traders, each with $1000 to invest on Jan 1, Year1.
LT Holder buys 100 shares of GOOD @ $10/share and holds it.
AG Trader also buys 100 shares of GOOD @ $10/share. On Sept 30, seeing the writing on the wall for the stock’s future returns, he sells his entire stake of GOOD, subtracts out taxes, and puts the entire remainder into BETR.

On June 30, Year 2, who is ahead?

LT Holder’s $1000 becomes $1500 by Sept 30, and by June 30 of Year 2 it’s $1875. Selling then, he pays $131.25 in taxes so his keep is $1743.75.

AG Trader’s $1000 also becomes $1500 by Sept 30, and he sells and has to pay $187.50 (37.5% marginal rate on $500 from 32% Fed and 5.5% State). He takes the $1312.50 remainder and puts it into BETR. By June 30, Y2, that has grown 50% to $1968.75. Selling on June 30, Y2, he pays another $246.09 in taxes so his keep is $1722.66. LT Holder comes out slightly ahead after 18 months.

Yes, this example was tailored to prove a point. And sure, you can quibble with the price increase rates I’ve chosen, the time periods the stocks are held, and of course your marginal tax rate might be less (but it might be more if you live in a high state tax state for instance). But, the point remains: If you’re trading in a taxable account you shouldn’t ignore the impact of taxes on your trades. And if you’re in a state like CA, remember there isn’t a LT Capital Gains rate, so you could pay as much as 13.3% to the state on any short term profits you make.

Those trading in IRA or other tax-deferred accounts should continue to be agile. Others need to consider their marginal tax rates and just how much better BETR will be than GOOD. If these are short-term trades, then even twice as good may not be good enough.

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I wrote: And if you’re in a state like CA, remember there isn’t a LT Capital Gains rate, so you could pay as much as 13.3% to the state on any short term profits you make.

Delete the phrase “short term” - in CA you pay your state marginal rate no matter how long you’ve held the stock.

This article (https://www.realized1031.com/capital-gains-tax-rate ) has an interactive map of the US where you can hover and see effective total marginal capital gains tax rates, followed by a table that you can click into for explanations. And yes, for high earners, the LT Cap Gain tax rate is now 20%, and there’s also the 3.8% NIIT surcharge tax.

Meanwhile, Amazon will pay $0 in taxes on $11,200,000,000 in profit for 2018: https://finance.yahoo.com/news/amazon-taxes-zero-180337770.h…

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If you’re buying or selling, or just holding for tax considerations you’re a trader. There are lots of ways to trade and lots of folks to help you navigate those decisions on other boards. Good luck.

Kip

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If you’re buying or selling, or just holding for tax considerations you’re a trader. There are lots of ways to trade and lots of folks to help you navigate those decisions on other boards. Good luck

According to the Monday Morning Rules, this board is for the discussion and analyzing of individual growth stocks in a cooperative and courteous manner and, secondarily, the philosophy around investing in them.

It seems to me that the topic here could fit under the philosophy part. Anyhow, I am not 100% certain that the thinking (philosophy) about potential tax-implications is entirely irrelevant and off-topic for the hyper-growth-investor. Especially not one who is frequently moving in and out of individual stocks, which seems to be the general case around here.

Just a thought, not looking to step on anyone’s toes here :slight_smile:

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Those trading in IRA accounts cannot deduct capital losses from capital gains the way non-IRA accounts can. I understand that stocks traded by this board NEVER go down but in the event that one had losses this would be pertinent.

Those trading in Traditional IRA accounts must pay tax on all withdrawals as ordinary income. (Except the proportion that was previously taxed…see www.irs.gov.) Long-term gains in non-IRA accounts are “qualified” for lower tax rates. Because of this, a stock for speculation (short-term “agile” trading) is equally taxed in non-IRA and IRA accounts. But a stock intended as a long-term hold is better held outside an IRA.

Wendy

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Hi Wendybg,

I wonder what the rationale is for not buying a long term hold in an IRA. I have a stock that I believe will triple by year end, I put it into my IRA though, I don’t expect to sell it for several years when I expect it reaches its potential. In the IRA, I won’t pay any tax until I take any money out that I need to live on (I’m 77)and that could be from any of the investments I hold in the IRA, whether long term or not.

Can you explain that for me?
Thanks so much,
Mykie

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Long-term capital gains on stocks held outside an IRA are taxed at lower rates.

Any money withdrawn from an IRA is taxed as ordinary income, at the maximum rate. The advantage of long-term capital gains on a stock is lost.
Wendy

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Hi Wendy,

How do you factor in the “untaxed” original deposits into the IRA, (perhaps significantly larger as a result of avoiding tax until later). This additional amount will eventually, given time, exceed the lower, long term tax rate of the taxable account will it not? I’ve not seen a table/chart discussing this but it has always been my reasoning (perhaps wrong).

Good discussion.

Bill

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I have also been thinking about whether to trade high growth names in my Roth or taxable account.

While the Roth adds the freedom of not worrying about taxable implications, you lose the safety of being able to write off poor decisions, which I have had a few of. I’m almost more inclined to cut losses more quickly in my taxable account, knowing that I can use the losses to offset the gains. For example, I recently sold NTNX shares for a loss from my taxable account to buy other companies, while I held onto my NTNX shares in my Roth, hoping that I could recoup some of my losses. I know this is poor reasoning, but I have a difficult time fighting it.

What are your thoughts on trading in Roth vs taxable accounts?

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Please go back and read number 51857 7 comments back. What does
this have to do with the analysis of particular stock investment.
This discussion is unrelated to the purpose of this board. SA
has plenty of places this topic can be discussed. This board
is being to look like SA & RB boards and seems to be getting
harder to get people to confirm to the rules. My interest is
finding growth stocks and making money.

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What are your thoughts on trading in Roth vs taxable accounts?

Just look at that people!!! This whole tread is way off-topic. Our board is for analyzing and discussing individual growth stocks. Please take the discussion off board.

Thanks for your cooperation.

Saul

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Roth vs Taxable- I suppose a lot of that depends on your tax bracket , and that depends on how lavish your life style. Personally I use mostly an IRA. And the prime reason for that is that I found my investing decisions being adversely effected by worrying about tax issues. The fewer decisions you have to make in investing , the better .An IRA allows compounding to work it’s full magic. Especially if you are young enough to enjoy the full magic of compounding and are not stuck with a high minimum withdrawal.
Or use any combination of the two. In the end death and taxes will prevail (unless you are a billionaire and even then you can only avoid one of them)

But never hold a losing stock position hoping to break even. Hope is not a sound strategy, and stock prices don’t care what you paid. Just stop doing it. Now would be a good time to start.

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<How do you factor in the “untaxed” original deposits into the IRA, (perhaps significantly larger as a result of avoiding tax until later). This additional amount will eventually, given time, exceed the lower, long term tax rate of the taxable account will it not?>

All distributions from a Traditional IRA which have not been previously taxed will be taxed as ordinary income when withdrawn. Use Form 8606 to report distributions of IRAs.

https://www.irs.gov/forms-pubs/about-form-8606

The IRS forces Required Minimum Distributions (RMDs) after age 70.5 but you can distribute (and pay taxes without penalty) anytime after age 59.5.

https://www.irs.gov/retirement-plans/plan-participant-employ…

Vanguard has an excellent calculator that shows the required distributions. If you wait until they are mandatory they will be higher.

https://personal.vanguard.com/us/insights/retirement/estimat…

To minimize taxes, begin earlier, smaller distributions. Pay the tax and roll over into a Roth IRA to tax-shelter future growth. Roth IRA distributions are not taxed and there is no RMD.

Wendy

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Tax-planning is OT.

Please take it private if you need to discuss this topic further.

Thanks for your co-operation :slight_smile:

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All distributions from a Traditional IRA which have not been previously taxed will be taxed as ordinary income when withdrawn. Use Form 8606 to report distributions of IRAs. The IRS forces Required Minimum Distributions (RMDs) after age 70.5 but you can distribute (and pay taxes without penalty) anytime after age 59.5. Vanguard has an excellent calculator that shows the required distributions. If you wait until they are mandatory they will be higher. To minimize taxes, begin earlier, smaller distributions. Pay the tax and roll over into a Roth IRA to tax-shelter future growth. Roth IRA distributions are not taxed and there is no RMD.

Wendy, Come on, you know this is completely Off Topic for our board! Our board is to discuss individual growth stocks, not IRA strategy. Please End This!

thanks

Saul

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