Do I have to pay Capital gains every time I do stocks rebalance?

[perita]

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Hi everyone,

I just started my career, and I am planning to allocate some money to the stock market.

I am doing some research, and I understand that I will need to hold stocks for at least a year to be considered qualified. My question after a year if I do some realignment after a year, Do I have to pay taxes since it will be considered as selling some stocks and buying some others?

 

[abolt18]

Hi everyone,

I just started my career, and I am planning to allocate some money to the stock market.

I am doing some research, and I understand that I will need to hold stocks for at least a year to be considered qualified. My question after a year if I do some realignment after a year, Do I have to pay taxes since it will be considered as selling some stocks and buying some others?

Only if you do it in a brokerage account. If you do it in your 401k/403b or IRA, then there are no tax consequences and you don't even need to wait the whole year.

Do you give money to charity? Because one excellent way to avoid paying capital gains taxes is to donate your appreciated shares to charity. Then you and the charity both get out of paying taxes on the gains. Just google "white coat investor donate appreciated shares" and it'll answer most if not all questions you could have.

Also, when you say realignment, do you mean rebalance? Or actually get out of a position and into another? Because instead of selling things to rebalance you can just use your regular purchases to rebalance.

 

[Chemist0157]

Unless things are really off balance, you should be able to just buy your positions up to your allocation goals.

But yes, if you sell in a taxable account, you will have a taxable event.

 

[perita]

Unless things are really off balance, you should be able to just buy your positions up to your allocation goals.

Got it thanks

 

[perita]

Also, when you say realignment, do you mean rebalance? Or actually get out of a position and into another? Because instead of selling things to rebalance you can just use your regular purchases to rebalance.

👍Yes rebalance, So a better strategy will be putting money in an ETF and never touch it until need it.

 

[abolt18]

[emoji106]Yes rebalance, So a better strategy will be putting money in an ETF and never touch it until need it.

Yes, you can just modify your contributions a couple times/yr to help rebalance to your desired asset allocation. No need to sell things unless you want to get out of that investment entirely.

Personally, there is no rebalancing for me, but that's just because my portfolio is exceptionally simple. Being early in my career, I've decided to stick with a single fund portfolio: VTSAX or its ETF equivalent (VTI). I just keep putting more in all the time and that's it.

 

[perita]

Personally, there is no rebalancing for me, but that's just because my portfolio is exceptionally simple. Being early in my career, I've decided to stick with a single fund portfolio: VTSAX or its ETF equivalent (VTI). I just keep putting more in all the time and that's it.

Yes, that is a good idea. I don't know if you guys will know the answer of this or should I talk to a CPA but let me give you this scenario.
Lets say I Invest 50K a year for 10 years, In year 12 I withdraw 50K.
What taxes do I pay? Are those 50K capital gains or are part of my 50K that I invested in year 10. Lets say I earned 6% in year 11 and 12 so maybe out of the 50K I withdrew , 45K are from my inversion and 5K are from my capital gain. How is this calculated?

 

[abolt18]

Yes, that is a good idea. I don't know if you guys will know the answer of this or should I talk to a CPA but let me give you this scenario.
Lets say I Invest 50K a year for 10 years, In year 12 I withdraw 50K.
What taxes do I pay? Are those 50K capital gains or are part of my 50K that I invested in year 10. Lets say I earned 6% in year 11 and 12 so maybe out of the 50K I withdrew , 45K are from my inversion and 5K are from my capital gain. How is this calculated?

It all depends on your basis. If the stock was $200 when you bought it (this is your basis) and $500 when you sold it, your capital gains for that stock is $300 and that gain will be taxed at 0-20% depending on your income. If you buy and sell 10 of those stocks at those prices, it's just 10X the above numbers.

In reality, you will be buying over time, so the value of that stock will change overtime, meaning some will have been bought at $200, $230, $287, $318, etc. The older the holding, the lower the basis typically.

When you sell stocks, you likely want to sell those with the highest basis to reduce your tax burden.

And again, if you donate a lot of money to charity, you can do that via appreciated shares and donor advised funds to reset your basis at higher value and reduce your tax burden when you sell later.

 

[perita]

And again, if you donate a lot of money to charity, you can do that via appreciated shares and donor advised funds to reset your basis at higher value and reduce your tax burden when you sell later.

This sound interesting. I will try to learn a little bit more about this.

 

[abolt18]

This sound interesting. I will try to learn a little bit more about this.

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