Wednesday's Tax Tip #16 - Capital Gains

Often times, taxpayer's are afraid to sell a stock for fear of triggering a capital gain.

In general the tax implication should be one of the last issues you consider when sell a capital stock. As I like to tell my clients, I would much rather have you pay capital gains tax on income than deduct losses.

Here is the decision making rationale I believe the owner's of capital assets should consider.

Can I make more money leaving my investment where it at or is there an investment where it will earn more?

For instance, assume you have a stock that you paid $15,000 for and now it's worth $24,000. you're decision should negate the $9,000 gain to date. The investment question should be, where can I invest that $24,000 where it will earn more? Maybe you decide to keep it where it's at because you like the long term prospects of the industry/company.

Maybe you decide there's a better place to invest that money, in which case you sell. But if you decide to hold on to that stock because you will have to pay $1,350 in capital gains tax, you may find that it costs you more money.

Let's assume that investment, now worth $24,000, drops to $22,000, you have just lost $2000 in real dollars, just because you didn't want to pay the capital gain; and you still have the capital gain tax.

Ideally, you would analyze your investment portfolio continually to maximize your gains. But time makes that impractical.

I would recommend that you corner your broker or account manager on a quarterly basis and review your portfolio and adjust your investments accordingly.

Hopefully, you've got quite a few capital gains, it means you're making money.