With the recent upward movement of the stock market, the S&P 500 has traded above 1,900 points, more than 20% above a long-standing old closing high of 1,565, set on October 9, 2007.
Because of the market recovery, many non-retirement investors may have used up their capital loss carry-overs. For example, when 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. Without loss carry-overs, many people hesitate to sell investments because of the tax implications.
But should you hold an appreciated asset just to avoid paying capital gains tax?
The current long-term capital gains rate is only 15% (for joint filers up to $250,000 adjusted gross income [AGI]), 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? There is even a 0% long-term capital gains rate for joint filers up to $73,800 AGI, and for individuals up to $36,900 AGI!
Also, if you are charitably inclined, you could consider gifting appreciated assets. Typically, this approach avoids taxes for both you and the charity, and you still can get a tax deduction. Qualified charities can generally then sell the appreciated assets and use the cash for their organizations and have no capital gain issues.
My advice is to not let yourself get locked into thinking capital gains are a bad thing that “cost” you. If there are reasons to consider selling the asset (such as underperformance) make sure you are thinking the decision through carefully. 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.