Very newbie question on stock sales/taxes

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
cbr shadow
Posts: 448
Joined: Wed Jul 10, 2013 2:12 pm

Very newbie question on stock sales/taxes

Post by cbr shadow »

This is a topic I should be familiar with but I'm not. Let say I invest $100k in VTSAX and it stays invested for a few years. 5 years later it's worth $175k.
If I sell $110k worth of shares, what do I pay in taxes? Do I only pay taxes on $10k of what I sold, since I already paid taxes on the initial investment ($100k)? In that case I still have $65k invested. If I sell that $65k I pay taxes on all of it, correct?
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Very newbie question on stock sales/taxes

Post by alex_686 »

You would be selling 62% (110/175) of your portfolio.

So your cost basis for that 110k would be 63k. i.e., 63% of your original 100k.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
knowledge
Posts: 489
Joined: Wed Mar 02, 2011 4:44 pm

Re: Very newbie question on stock sales/taxes

Post by knowledge »

It depends on how you decide to track your basis. Read up here: https://www.bogleheads.org/wiki/Cost_basis_methods
increment
Posts: 1736
Joined: Tue May 15, 2018 2:20 pm

Re: Very newbie question on stock sales/taxes

Post by increment »

If you put $100,000 in when the share price is $100, then you would have 1000 shares. Then if you later sell 628.6 of those shares when the share price is $175, you would receive $110,005. $47145, the profit on those 628.6 shares (at $75 profit per share), would have to be added to your taxable income.

If you reinvested your quarterly dividends, then each of those transactions would be a separate batch, a.k.a. "lot," when it comes to the tax accounting for sales.

See also the wiki.
Doctor Rhythm
Posts: 3061
Joined: Mon Jan 22, 2018 2:55 am

Re: Very newbie question on stock sales/taxes

Post by Doctor Rhythm »

cbr shadow wrote: Tue Nov 30, 2021 1:24 pm This is a topic I should be familiar with but I'm not. Let say I invest $100k in VTSAX and it stays invested for a few years. 5 years later it's worth $175k.
If I sell $110k worth of shares, what do I pay in taxes? Do I only pay taxes on $10k of what I sold, since I already paid taxes on the initial investment ($100k)? In that case I still have $65k invested. If I sell that $65k I pay taxes on all of it, correct?
Every share has gone up in price, and ~ 43% of the price of each share is unrealized capital gain:

$75K / $175 = around 43%.

Therefore, 43% of each share you sell is taxable profit (realized capital gain), so 0.43 x $110K = $ 47.3K taxable.

It’s the same answer (within rounding error) that others give above, just a different way to think about it. Your post is incorrect because the IRS cares about the taxable profit for each share sold, not the fraction of your portfolio that is sold.
User avatar
calmaniac
Posts: 1325
Joined: Fri Jan 30, 2015 2:32 pm

Re: Very newbie question on stock sales/taxes

Post by calmaniac »

Just to point out to OP the the taxes you pay are capital gains taxes, not income tax. If you hold the stock ≥1year, you pay long-term capital gains tax See Wiki and look for "Long-term capital gain rate".
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
Topic Author
cbr shadow
Posts: 448
Joined: Wed Jul 10, 2013 2:12 pm

Re: Very newbie question on stock sales/taxes

Post by cbr shadow »

Thank you everyone for explaining this. This makes sense now.
calmaniac wrote: Tue Nov 30, 2021 3:42 pm Just to point out to OP the the taxes you pay are capital gains taxes, not income tax. If you hold the stock ≥1year, you pay long-term capital gains tax See Wiki and look for "Long-term capital gain rate".
As for capital gains, how does it work if you make regular purchases? Say I purchase every month for 10 years, then I sell a big portion of shares? Can I direct it to sell my old shares rather than new shares so that I only pay capital gains?
dukeblue219
Posts: 4074
Joined: Fri Jan 29, 2016 11:40 am

Re: Very newbie question on stock sales/taxes

Post by dukeblue219 »

cbr shadow wrote: Tue Nov 30, 2021 5:29 pm Thank you everyone for explaining this. This makes sense now.
calmaniac wrote: Tue Nov 30, 2021 3:42 pm Just to point out to OP the the taxes you pay are capital gains taxes, not income tax. If you hold the stock ≥1year, you pay long-term capital gains tax See Wiki and look for "Long-term capital gain rate".
As for capital gains, how does it work if you make regular purchases? Say I purchase every month for 10 years, then I sell a big portion of shares? Can I direct it to sell my old shares rather than new shares so that I only pay capital gains?
It's not that you would pay "only" capital gains, but that you would pay long term capital gains tax vs short term capital gains tax.

Yes, you can sell FIFO (first in first out) or sell specific lots of shares, or a few other ways to do it. Sometimes people even want to sell the most recent lot they bought because it had the highest purchase price and now is the only lot with a capital loss.
User avatar
calmaniac
Posts: 1325
Joined: Fri Jan 30, 2015 2:32 pm

Re: Very newbie question on stock sales/taxes

Post by calmaniac »

cbr shadow wrote: Tue Nov 30, 2021 5:29 pm Thank you everyone for explaining this. This makes sense now.
calmaniac wrote: Tue Nov 30, 2021 3:42 pm Just to point out to OP the the taxes you pay are capital gains taxes, not income tax. If you hold the stock ≥1year, you pay long-term capital gains tax See Wiki and look for "Long-term capital gain rate".
As for capital gains, how does it work if you make regular purchases? Say I purchase every month for 10 years, then I sell a big portion of shares? Can I direct it to sell my old shares rather than new shares so that I only pay capital gains?
Yes, you can sell specific lots to maximize or minimize capital gains as you see fit.

For example, if you want to sell some of your appreciated VTSAX to provide cash, you could sell recent lots that have less capital gains to minimize the tax you pay. Conversely, if you are donating shares to a charity, it typically makes the most sense to donate the most appreciated shares with the greatest capital gains, as that will have the greatest tax benefit to you.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
fyre4ce
Posts: 2544
Joined: Sun Aug 06, 2017 11:29 am

Re: Very newbie question on stock sales/taxes

Post by fyre4ce »

cbr shadow wrote: Tue Nov 30, 2021 5:29 pm Thank you everyone for explaining this. This makes sense now.
calmaniac wrote: Tue Nov 30, 2021 3:42 pm Just to point out to OP the the taxes you pay are capital gains taxes, not income tax. If you hold the stock ≥1year, you pay long-term capital gains tax See Wiki and look for "Long-term capital gain rate".
As for capital gains, how does it work if you make regular purchases? Say I purchase every month for 10 years, then I sell a big portion of shares? Can I direct it to sell my old shares rather than new shares so that I only pay capital gains?
You have to make sure to tell your brokerage to track basis by "specific identification" of shares to do this. There are other ways to track the cost basis (ie. what you paid) for the shares, like average. Specific identification gives you maximum control and thus is usually preferred. Although, the number of tax lots can get very high if you are automatically reinvesting dividends and hold the fund for a while. One way around this is to not automatically reinvest dividends, and do it manually every quarter or so.
Post Reply