predicting mutual funds capital gains from a sale

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PerfectName
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predicting mutual funds capital gains from a sale

Post by PerfectName »

I am thinking about selling a chunk of mutual funds from a regular savings account. I want to predict the amount of capital gains (presumably all long term except for dividend reinvestment) to stay below the threshold that would push me from a 15% rate to a 20% rate. I might even plug some example amounts into TurboTax to see the resulting tax liability.

So, is the math as simple as looking at the difference between the average cost basis (which is on the most recent statement) and subtracting it from the current value per share, and multiplying it by the number of shares sold? I am uncertain because I pay taxes on something (yeah, obviously without really thinking about it...) on my mutual funds every year per what is reported on 1099-DIV). So I don't know if that somehow needs to get factored in and complicate the otherwise simple calculation.

Info and insights would be appreciated.
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grabiner
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Re: predicting mutual funds capital gains from a sale

Post by grabiner »

If you bought on different dates, you shouldn't use average cost basis. Specific identification of shares can significantly reduce your taxable capital gain, as you sell only those shares with the highest basis (or possibly those with the highest basis that have long-term gains.)

Reinvestment doesn't change your basis, but it creates additional shares. If you bought 1000 shares for $10 per share, and you receive a $240 dividend which you reinvest at $12 per share, you now have 1020 shares with a total basis of $10240. If you sell the whole thing, you pay capital gains on the difference between the sales proceeds and $10240, rather than the difference to your $10000 initial investment.
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venkman
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Re: predicting mutual funds capital gains from a sale

Post by venkman »

PerfectName wrote: Fri Sep 24, 2021 8:32 pm So, is the math as simple as looking at the difference between the average cost basis (which is on the most recent statement) and subtracting it from the current value per share, and multiplying it by the number of shares sold? I am uncertain because I pay taxes on something (yeah, obviously without really thinking about it...) on my mutual funds every year per what is reported on 1099-DIV). So I don't know if that somehow needs to get factored in and complicate the otherwise simple calculation.
It's that simple if you use the average cost basis method.

If you use the specific ID method, you can choose the shares that have the highest long term cost basis and sell those. If you do that, you can minimize your current tax liability for selling a given number of shares.
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PerfectName
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Re: predicting mutual funds capital gains from a sale

Post by PerfectName »

Thanks for the helpful replies. I hadn't thought about the potential advantages of selling specific shares. These are funds where my initial set of investments were made 10 or 15 years ago, and I have just been letting them sit and reinvesting dividends. Given your feedback, I guess what happens is that from a tax perspective the annual dividends are just a category of income, and so I pay tax on them annually. That I then use that income to purchase more shares of the fund (albeit invisibly behind the scenes) is mostly irrelevant. However, the dividend reinvestment obviously is just another purchase of shares with their own cost basis and which would also influence the overall average cost basis. Which of those two bases is relevant depends on the chosen approach to selling shares.

Sound right?
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celia
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Re: predicting mutual funds capital gains from a sale

Post by celia »

venkman wrote: Fri Sep 24, 2021 11:11 pm If you use the specific ID method, you can choose the shares that have the highest long term cost basis and sell those. If you do that, you can minimize your current tax liability for selling a given number of shares.
Of course, this also means that next time you sell, your gains will be larger than now --or-- you will want to sell fewer shares than this time.

To help you understand this better, I suggest you sign into your account and look for the cost basis/unrealized gains and then choose something like "see details" to break the fund/ETF holding into separate lines for each lot purchased (which includes re-invested dividends).
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grabiner
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Re: predicting mutual funds capital gains from a sale

Post by grabiner »

celia wrote: Sat Sep 25, 2021 1:03 pm
venkman wrote: Fri Sep 24, 2021 11:11 pm If you use the specific ID method, you can choose the shares that have the highest long term cost basis and sell those. If you do that, you can minimize your current tax liability for selling a given number of shares.
Of course, this also means that next time you sell, your gains will be larger than now --or-- you will want to sell fewer shares than this time.
But this is still a net benefit, because you pay tax on the same amount later. If you pay 15% tax on capital gains and want to sell half a holding with $100K in unrealized gains, average cost means that you take $50K in gains now and pay $7500 in tax now, then $7500 more when you sell the other half. You would prefer to sell half with $30K in gains and pay $4500 tax now, deferring $10,500 in tax until you later need to sell the other half, because the $3000 you don't pay now can stay invested.
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