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How does one deal with the increasing large capital gains taxes that result from selling stock, which has appreciated, when one finds what is thought to be a better investment? Is it better to NEVER sell, to avoid a capital gains tax? I had a stop loss order in on a company which I had a large gain; it lost 40% in 2 days, the sale executed, and now I have a giant tax bill due to Uncle Sam. The company has since recovered and then some, and I would have had an even better paper gain had I not sold, but who has that crystal ball?
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<<How does one deal with the increasing large capital gains taxes that result from selling stock, which has appreciated, when one finds what is thought to be a better investment?>>

Two ways that I can think of:

1. Sell...pay the tax...purchase the new investment; or

2. Hold the current investment and borrow money to purchase the new investment.

<< Is it better to NEVER sell, to avoid a capital gains tax? >>

I never let tax issues get in the road of TRUE economic issues. I'll always make sure that I'm looking at the tax issues, and try to minimize my taxes whenever possible. But I will virtually NEVER let a tax issue stand in the way of a potentially valuable economic transaction. I don't want to let the tax tail wag the dog.

<<I had a stop loss order in on a company which I had a large gain; it lost 40% in 2 days, the sale executed, and now I have a giant tax bill due to Uncle Sam.>>

But...if you believed in the company...REALLY believed in the company...you wouldn't have had the stop loss in place at all, right? But you felt it necessary to set the stop, and so you have to deal with the tax consequences. If you didn't have the stop, you would own stock worth 40% less than it was just a few days ago. But if you believe in the stock over the long term, this might not be all that bad (in the long term).

<< The company has since recovered and then some, and I would have had an even better paper gain had I not sold, but who has that crystal ball?>>

This is one of the very reasons that the Fool HATES stop losses, and doesn't use 'em. Neither do I. If I have what I believe is a good, strong, long-term company, I won't need a stop loss. I'll take my lumps and lick my wounds and wait for the price to recover. It it does, then I can be proud that my research was good. If it doesn't, my reasearch might not have been as good as I originally thought.

But I'm always looking at least 5 years down the line. What happens today, this month, or even this year is of very little importance to me...especially when it has to do only with stock PRICE and not the value of the company.

Just my $.02. Your results may vary.

TMF Taxes
Roy
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Hi TMF Taxes Roy,
Thanks for the advice; I'm learning alot from the Fool, both 'net and books. This was my first post, and surely not the last.
<<1. Sell...pay the tax...purchase the new investment>>
Since the time between my sell/new purchase and April 17 was 6 mos, I've invested the cash that I now could use to pay the tax. Do people actually set aside their estimated tax payment when they sell, or cash in poor performers when April 15 rolls around?

<<But...if you believed in the company...REALLY believed in the company...you wouldn't have had the stop loss in place at all, right? >>
I was trying to follow O'Neill's(IBD paper) rule about putting in stops, moving them up as the stock appreciates, cutting losses and letting winners run...

<<This is one of the very reasons that the Fool HATES stop losses, and doesn't use 'em. Neither do I. If I have what I believe is a good, strong, long-term company, I won't need a stop loss... But I'm always looking at least 5 years down the line. What happens today, this month, or even this year is of very little importance to me...especially when it has to do only with stock PRICE and not the value of the company.>>
I often have a hard time telling what is a good, strong, long-term company if ones doesn't use price performance as a guide. How can one figure value of the company, without stock price as confirmation? BTW, the company I was speaking of was 3COM.
Thanks,
Shredbetty
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No. of Recommendations: 1
<<<<1. Sell...pay the tax...purchase the new investment>>
Since the time between my sell/new purchase and April 17 was 6 mos, I've invested the cash that I now could use to pay the tax. Do people actually set aside their estimated tax payment when they sell, or cash in poor performers when April 15 rolls around?>>

Well...unless you fall under the "safe harbor", you really need to "pay as you go" in order to avoid penalties. So it's not only the tax due on April 15th that's at issue. I think that you should visit the Taxes FAQ area and read more about estimated taxes. It'll tell you how to sail into the safe harbor and how estimated taxes work.

<<<<But...if you believed in the company...REALLY believed in the company...you wouldn't have had the stop loss in place at all, right? >>
I was trying to follow O'Neill's(IBD paper) rule about putting in stops, moving them up as the stock appreciates, cutting losses and letting winners run...>>

Which is fine, but it's not Foolish. I think what you want to do is look at all of the pros and cons of any investment technique and stick with it. Surely the people who promote the stop loss theory told you what could happen, didn't they? And it did. And that's the problem with screwing around with stop losses...at least IMHO.

<<This is one of the very reasons that the Fool HATES stop losses, and doesn't use 'em. Neither do I. If I have what I believe is a good, strong, long-term company, I won't need a stop loss... But I'm always looking at least 5 years down the line. What happens today, this month, or even this year is of very little importance to me...especially when it has to do only with stock PRICE and not the value of the company.>>
I often have a hard time telling what is a good, strong, long-term company if ones doesn't use price performance as a guide. How can one figure value of the company, without stock price as confirmation? BTW, the company I was speaking of was 3COM.>>

Well, now you're getting out of the area of taxes and into the guts of Foolish investing. So I'll have to leave you here and point you to the Fools School for more information. I've got a deal with the Gardners: they don't give tax advice and I don't give investment advice. :-)

Good luck in your Foolish education.

TMF Taxes
Roy
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