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Neighbors of Kane County

When should you sell? The myth of “locking in” gains

Jan 11, 2018 09:18AM

by Steve Ciaccio, MBA, CPA, CFP®

If your investments have gone up in value, should you sell now? I have heard of instances where people were told by their advisor to sell one stock to lock in gains and buy another stock with the proceeds. Considering the following factors might have the potential to help you improve your returns.

Transaction cost: How much of a commission will be charged to you for the sale? Also, if you plan to purchase another stock to replace the old one, what is the transaction cost for that as well? Do the expected gains from the replacement investment sufficiently outweigh the cost of the transactions to justify the move?

Taxes: If the investment is not in a 401(k), IRA, or other tax qualified account, the transaction might result in a tax liability for you. The amount of tax, if any, would depend on several factors including the length of time the investment was held as well as your income tax bracket. As such, you might want to consider if the timing is appropriate. With the currently considered tax proposal continuing to unfold, you might also want to consider if the risk of holding on to your investment is worth any potential tax relief that might result in the future or if you are better off paying any potential taxes under the current rules.

Estate planning and your cost of the investment: The technical term for the cost of the investment that you can deduct from the proceeds for tax purposes is called your “cost basis”, also called “basis”. If you purchased the stock, your cost basis is generally the amount that you paid for the stock plus certain transaction costs. If the stock was given to you as a gift, determining the cost basis can be a bit more complex. If you inherited the stock, the cost basis is generally the value of the stock at the time of passing of the decedent, regardless of that person’s cost basis in the investment. The latter situation can sometimes result in an opportunity. For example, if the decedent paid $100 per share for the stock and the value at the time of passing was $1,000 per share, then even though the decedent’s basis was $100 per share, your basis is $1,000 per share. So, if you sell it for $1,000 per share, there will be no capital gain tax even though the gain would have been $900 per share if the decedent sold it at the same price. With this in mind, you might want to consider whether or not the risk of holding the stock is worth the potentially beneficial tax impact on your heirs. Remember, tax laws can be subject to change in the future.

Risk and the outlook for the investment: If you sell one investment only to buy another, have you really locked in anything other than potential taxes and other expenses? Is the reality that your money is still at risk? There could be compelling reasons to complete the transactions. However, if your intent is to continue to have your money at risk in the stock market, ask yourself whether or not you would be better off simply holding the original stock. Consider the potential risk versus potential reward of each investment decision before proceeding.

Advisor motivation: There are many conscientious financial advisors. There are many valid reasons to advise a client to sell an investment and replace it with another. However, generating commissions through transactions has the potential to create conflicting interests. Given the factors mentioned above as well as others, you might want to consider whether or not your advisor is providing advice that is in your best interest.

There are many other reasons to buy or sell an investment. You should consult with a reputable and capable Certified Financial Planner™ practitioner and a reputable and capable Certified Public Accountant as well. In addition, arming yourself with knowledge and using careful consideration when making investment decisions might prove to be beneficial to you.

All the best to you!

Steve Ciaccio, MBA, CPA, CFP® is the founder of Ciaccio Wealth Management, Ltd., located at 232 S. Batavia Ave., Batavia. He can be reached at 630-454-4599, Steve.Ciaccio@LPL.com. The opinions voiced in this article are for general information only and are not intended to provide specific investment advice, tax advice, or recommendations for any individual.

Ciaccio Wealth Management, Ltd. and LPL Financial do not provide tax advice or services. Please consult your local tax advisor regarding your specific situation.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

Copyright Steve Ciaccio 2018