Paul - For Shame! There is a powerful reason which you neglected to mention for selling a stock: tax- loss selling. Suppose you have a substantial loss in a stock ( something most investors haven't seen recently). If you sell the stock, thereby establishing the loss, you can write off up to $3000 (married couples) in the current yr, and can carry forward the unused balance to take additional writeoffs in future years. By taking the write-off, the government in effect subsidizes the loss.
Let's assume you're in the 40% marginal tax bracket (fed + state) and the loss is $10,000. This loss will actually cost you only $6000 if you write it off because it lowers the income taxes you would otherwise have paid by $4000. You lost $10,000 in portfolio value but your wealth only declines by $6000 because you paid $4000 fewer taxes compared to not selling.
If you fail to establish the loss, you will be $10,000 poorer. This analysis is admittedly something of a simplification because it doesn't consider future capital gains tax liabilities. If I decide to hold on to stock A, in which I have a loss, I figure to pay less cap. gains taxes on it in the future compared to replacement stock B if I did sell. Nonetheless, because of present value, the value of the write off today is greater than what you would save in capital gains taxes if you hold the loser stock and sell it later. Taking the writeoff today is equivalent to getting an interest free loan.
Actually, it can be even better than that. Why? Because it's not necessary that you pay ANY capital gains taxes, ever As some lawyers are fond of saying, the cap. gains tax is the only truly voluntary tax. As long as you don't sell, this tax is irrelevant. Stocks can be transferred from one generation to another without triggering the cap. gains tax.
From a tax standpoint it's right to liquidate stocks in which you have a loss. You do it not because you think these stocks are bad investments at the point you dump them, or that you expect them to fall further. You do it because of the incentives created by the tax code. The gov't in effect subsidizes you to dump them, and buy something else. The benefits of the subsidy must of course be weighed against any transactions costs.
Best regards |
