3 ms·

Riddle: if I purchased on May 3 2016 I'd be worse off selling on May 1 2017 than holding. Why?

by bbcbasic 9y ago

cortesoft 9y ago
Long term capital gains vs short term?
- wahern 9y ago
  Doesn't compute. You're only taxed on the _gain_, which means as long as your selling price is greater than your purchase price then, ignoring inflation, commissions, etc, you're always ahead as long as the tax rate is less than 100%. Anyhow, the closing price on May 3, 2016 was $3.60. The closing price on May 1, 2016 was $13.30. Even if the entire sale price was taxed, and assuming you're already fairly wealthy, you'd need a marginal tax rate of well over 50%. The top marginal federal income tax rate is %39.6; the top state marginal income tax is 13.3%. Even a 53% tax on the total sale price wouldn't cause you to lose money.
  - darawk 9y ago
    While true, you are taxed at different rates for different holding periods. If you hold for < 1 year, that is a short term capital gain, and is taxed at your ordinary income rate (~35%, let's say). If you hold for > 1 year, your gain is taxed at 15%.
    - wahern 9y ago
      Sure. But there's always a gain, regardless. The riddle was why would you be worse off holding rather than selling. Anyhow, if we grant the riddle was poorly worded, that the implication was waiting an additional day you're be better off, it's still technically incorrect. The clock starts ticking the day after the purchase, and you have to hold for a year and a day. If you purchase on May 3 2016 you shouldn't sell before May 5 2017. Possibly May 4 or even May 3 if I'm misunderstanding something, but almost certainly not May 2.
      - darawk 9y ago
        > Sure. But there's always a gain, regardless. Not true. Suppose you buy a stock for $5 on Jan 1 2016. It rises to $20 on Jan 1 2016. If you sell on Jan 1, you make 15x.65 9.75. If you hold until Jan 2 and the price declines by $1 to $19, you make 14x.85=11.9. Hence, you're better off holding till the next day, even though the stock goes down.
  - cortesoft 9y ago
    In this example, you are better off taking the short term capital gains penalty (I did the math in a sibling comment). However, your logic isn't correct; no one is arguing that you would be better off having never purchased the stock at all versus paying short term capital gains. What we are trying to figure out is if it is worth taking LESS profit in order to pay LESS taxes. This calculation depends on how much less profit we are talking; as long as the profit lost by waiting until one year for long term capital gains to kick in is less than the difference in tax rate, it is worth it to wait. You can prove that both situations are possible is easy to show. If your profit before long term kicks in is $10 and the profit after is $9.99, it is obviously better to wait until long term kicks in; you are going to pay WAY more than 1 penny per share in extra taxes. However, if the profit goes from $10 to $2 a share, it is obviously better to take the higher profit and pay the extra tax.
- cortesoft 9y ago
  Although, in doing the math, I still think you would be better off taking the short term capital gain hit for the extra profit - if long term is taxed at 15%, and lets say you get even 40% hit for short term, you are still better off taking the higher share price: (13.6 - 3.7) * 0.6 = $5.94 profit per share (10.32 - 3.7) * 0.85 = $5.63 profit per share Should sell and take the short term capital gains hit!

Riddle: if I purchased on May 3 2016 I'd be worse off selling on May 1 2017 than holding. Why?

cortesoft 9y ago

Long term capital gains vs short term?

wahern 9y ago
Doesn't compute. You're only taxed on the _gain_, which means as long as your selling price is greater than your purchase price then, ignoring inflation, commissions, etc, you're always ahead as long as the tax rate is less than 100%. Anyhow, the closing price on May 3, 2016 was $3.60. The closing price on May 1, 2016 was $13.30. Even if the entire sale price was taxed, and assuming you're already fairly wealthy, you'd need a marginal tax rate of well over 50%. The top marginal federal income tax rate is %39.6; the top state marginal income tax is 13.3%. Even a 53% tax on the total sale price wouldn't cause you to lose money.
- darawk 9y ago
  While true, you are taxed at different rates for different holding periods. If you hold for < 1 year, that is a short term capital gain, and is taxed at your ordinary income rate (~35%, let's say). If you hold for > 1 year, your gain is taxed at 15%.
  - wahern 9y ago
    Sure. But there's always a gain, regardless. The riddle was why would you be worse off holding rather than selling. Anyhow, if we grant the riddle was poorly worded, that the implication was waiting an additional day you're be better off, it's still technically incorrect. The clock starts ticking the day after the purchase, and you have to hold for a year and a day. If you purchase on May 3 2016 you shouldn't sell before May 5 2017. Possibly May 4 or even May 3 if I'm misunderstanding something, but almost certainly not May 2.
    - darawk 9y ago
      > Sure. But there's always a gain, regardless. Not true. Suppose you buy a stock for $5 on Jan 1 2016. It rises to $20 on Jan 1 2016. If you sell on Jan 1, you make 15x.65 9.75. If you hold until Jan 2 and the price declines by $1 to $19, you make 14x.85=11.9. Hence, you're better off holding till the next day, even though the stock goes down.
- cortesoft 9y ago
  In this example, you are better off taking the short term capital gains penalty (I did the math in a sibling comment). However, your logic isn't correct; no one is arguing that you would be better off having never purchased the stock at all versus paying short term capital gains. What we are trying to figure out is if it is worth taking LESS profit in order to pay LESS taxes. This calculation depends on how much less profit we are talking; as long as the profit lost by waiting until one year for long term capital gains to kick in is less than the difference in tax rate, it is worth it to wait. You can prove that both situations are possible is easy to show. If your profit before long term kicks in is $10 and the profit after is $9.99, it is obviously better to wait until long term kicks in; you are going to pay WAY more than 1 penny per share in extra taxes. However, if the profit goes from $10 to $2 a share, it is obviously better to take the higher profit and pay the extra tax.
cortesoft 9y ago
Although, in doing the math, I still think you would be better off taking the short term capital gain hit for the extra profit - if long term is taxed at 15%, and lets say you get even 40% hit for short term, you are still better off taking the higher share price: (13.6 - 3.7) * 0.6 = $5.94 profit per share (10.32 - 3.7) * 0.85 = $5.63 profit per share Should sell and take the short term capital gains hit!