With the recent upward movement of the stock market, the S&P 500 recently traded at 1,400 which is only 165 points (or about 10%) below the all-time closing high of 1,565 set on October 9, 2007.
It is because of the market recovery that I have seen a trend where non-retirement investors are starting to use up their capital loss carry-overs. For example, if you sell a mutual fund at a loss, you can apply up to $3,000 of the loss against your other income (after netting with any gains) and the rest of the loss can be carried over into future tax years at the federal tax level. Once the losses are used up, future capital gains would be subject to tax.
So should you hold an appreciated asset to avoid paying capital gains tax?
First of all, if you are charitably inclined, you could consider gifting appreciated assets. Typically this approach avoids taxes for both you and the charity. Qualified charities can generally then sell the appreciated assets and use the cash for their operations and have no capital gain issues.
Secondly, and the main point I want to make is that the current long-term capital gains rate is only 15%, which makes the “keeping” rate 85%. Put another way, would you turn down a $10,000 pay raise because you didn’t want to pay Uncle Sam $1,500 in taxes? My advice is to not let yourself get locked into thinking capital gains are a bad thing that “cost” you. Always remember the “keeping” rate is what matters and that taking some gains during a market rally is much better (after taxes) than potentially seeing your investment decline, leaving you no gain at all.