There has started to be some discussion about the effect the possible change in tax rate is having in the stock market. I have mentioned previously that I believe this to be the case and I worked up a spreadsheet to calculate the effect of changing tax rates on positions subject to long term capital gains.
RELATIVE GAIN (for a $100 position) IN PORTFOLIO IF ONE SELLS AND
LONG TERM CAP GAINS GOES FROM 15% to 40%
| return in time gap while one is out of the stock | |||||||
| -5% | -3% | 0% | 3% | 5% | 8% | ||
| current gain | -20% | $(2.43) | $(3.62) | $(4.82) | $(6.02) | $(7.21) | $(8.41) |
| -10.00% | $0.29 | $(1.06) | $(2.41) | $(3.76) | $(5.11) | $(6.45) | |
| 0.00% | $3.00 | $1.50 | $- | $(1.50) | $(3.00) | $(4.50) | |
| 10.00% | $5.71 | $4.06 | $2.41 | $0.76 | $(0.89) | $(2.55) | |
| 20.00% | $8.43 | $6.62 | $4.82 | $3.02 | $1.21 | $(0.59) | |
| 30.00% | $11.14 | $9.19 | $7.23 | $5.27 | $3.32 | $1.36 | |
| 40.00% | $13.86 | $11.75 | $9.64 | $7.53 | $5.42 | $3.31 | |
| 50.00% | $16.57 | $14.31 | $12.05 | $9.79 | $7.53 | $5.27 | |
| 60.00% | $19.29 | $16.87 | $14.46 | $12.05 | $9.63 | $7.22 | |
| 70.00% | $22.00 | $19.44 | $16.87 | $14.30 | $11.74 | $9.17 | |
| 80.00% | $24.72 | $22.00 | $19.28 | $16.56 | $13.84 | $11.13 | |
| 90.00% | $27.43 | $24.56 | $21.69 | $18.82 | $15.95 | $13.08 | |
This spreadsheet is calculated for a change in rates from 15% to 40%. The rows represents your current gain (in %) on a given stock. The columns represent the change in stock price in the 1 month period (this might be 1 month + one day check with your accountant) that one has to be out of the stock to establish a new position in the same stock.
The basic idea is that if you sell in order to take advantage of current tax law, then, if the stock subsequently goes down, happy days. But if the stock goes up, then you have a little cushion where you are still ahead of the game. Example, if you are up 30% on a stock and you sell and the stock goes up 8% during the time you have to be out to satisfy the tax law, then you still benefit by $1.36 (1.36%) and that benefit goes up the more gain you have in the stock.
If the tax rate difference turns out to be less, then the effect is smaller.
Just an FYI to make sure and check that the path you take makes economic sense. Run your own scenarios.
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