TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, October 21, 2012

Advice to the Wealthy: SELL!

Bloomberg:  Wealthy Advised to Sell for Gains Before Unfriendly 2013:

That’s the message from some financial advisers, who are telling wealthy clients that the remainder of 2012 amounts to a last-chance sale on federal tax rates. Taxes are set to rise in January in the U.S., pushing the top rate on dividends to 43.4% from 15% and the top rate on capital gains to 23.8% from 15%. ...

Advisers at companies including Wells Fargo, Bank of America, Bank of New York, JPMorgan Chase, Northern Trust and U.S. Bancorp are discussing with their wealthy clients such strategies as selling appreciated securities, relocating assets to tax-deferred retirement accounts, converting IRAs, exercising stock options and making large gifts to heirs this year.

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=An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds -- after capital gains taxes -- of $88, said Robert Barbetti, managing director and executive compensation specialist at J.P. Morgan Private Bank.=

Leading to the conclusion that he is based in Florida or Texas, since he shows no concern for state income tax. But no, the story places him in New York.

If markets were rational (of course, we know they are not) then this would be the advice: Don't sell now, because everyone else is selling to avoid higher taxes next year. Supply is high; demand is low because of political uncertainty. Rather, buy more on margin, since interest rates are at historic lows. Next year, when supply dries up because investors are avoiding tax on sales, sell the new stuff. Keep what you already own, remembering you bought it because it was the best investment.

Posted by: Bob | Oct 21, 2012 11:18:15 AM

There are no fewer than three problems with this advice. First, it is far from clear that Congress and the White House, no matter who wins the presidential election, will fail to resolve the fiscal cliff issue. Second, U.S. income tax law allows an investor to control the precise moment when she or he wishes to realize gains or losses. Third, this sort of panicked talk exacerbates all of the behavioral pitfalls that face human investors. As if the disposition effect didn't already post a formidable barrier to rational investing, advising investors to sell and sell hard in anticipation of tax law changes that may not actually materialize invites the tax tail to wag the investment dog. In an ideal legal world, we should see how this advice survives a fiduciary standard.

Posted by: Jim Chen | Oct 21, 2012 1:59:42 PM

Yeah. Like THAT won't leave a mark.

Posted by: The Grey Man | Oct 21, 2012 8:31:42 PM

I think I'd wait til after the election!

(Unless .... the market is thinking the same thing ?!?!...)

Posted by: KevinF | Oct 21, 2012 8:57:08 PM

Tax-deferred retirement accounts which will pay even higher taxes in the future to pay for 16 trillion deficits, or will be confiscated by greedier politicians.

If you have tax-deferred retirement accounts, you don't own them, somebody else, i.e. big govt. politicians do.

It's very unfair you know that you enjoy your retirement years with tax-deferred accounts while other oldies' soc. security benefits are cut.

Posted by: elkh1 | Oct 21, 2012 8:58:01 PM

Not only will they be taxed to death, but with the way the fed is inflating the money supply, if we ever do have a breath of recovery they will be inflated away with hyper inflation. Under Obamas america, the only safe haven left is to be an obama crony.

Posted by: richard40 | Oct 21, 2012 9:09:35 PM

Congress loves to make temporary solutions permanent. Remember, the B-52 bomber was an interim solution until the bomber that the Air Force really wanted could come on line.70 years later it is still in service. If Congress was as dysfunctional in WWII, we would have been bombing Berlin with airships, or trying to.

Posted by: Donm | Oct 21, 2012 9:16:07 PM

I think I'd wait til after the election!
(Unless .... the market is thinking the same thing ?!?!...)

It's too late. Obama might be beaten on Nov 6 but he won't be OUT until Jan 21.

Posted by: chaz | Oct 21, 2012 10:26:27 PM

Bob, will the people selling keep their proceeds in dollars?

If your transaction costs are low enough, it might make sense to sell a sufficiently appreciated stock and then buy it right back after paying the capital gains taxes on past appreciation.

Posted by: roystgnr | Oct 21, 2012 11:20:18 PM

re: relocating assets to tax-deferred retirement accounts

Perhaps I'm missing a good bet, but aren't withdrawals from tax deferred retirement accounts taxed at ordinary rates? If so, does it make sense for a high income earner to move capital assets to a tax deferred retirement account in order to avoid, in the near term at least, an increased capital gains tax, which is likely to be lower than the ordinary rate he will pay for any subsequent withdrawals he makes from his retirement account?

Posted by: Baba Ganoush | Oct 21, 2012 11:33:47 PM

To those who say wait because of state tax concerns, or low stock prices because of selling pressures etc. - I think the dominant force will be a falling market as we are forced to pay for Obama's party, to deal with the structural deficits and the states are forced to face their pension problems. I see almost no up side to the market in the coming years. Get out now for economic reasons aside from tax law changes.

Posted by: Over50 | Oct 22, 2012 3:29:26 AM

Sell & buy back, realize your gains, reset your basis higher, paying 15% of your gain.

If there is any significant chance you'll want to sell in the next few years (even simply to move to different stocks) you've got a good chance to be better off taking 15% LTCG rates now, and minimal downside (sure you lose 15% of the gain now instead of later, but given what you'd lose later that's a small percentage loss and if the rate is 28%+ you'll certainly lose less).

The only justification for not selling (even just to re-buy) and reset your basis is either you believe Congress will act rapidly, rationally, and responsibly; or you're planning on holding the same stocks without any desire to sell for many years and have no expectation of selling or moving stocks (so the gains from keeping the extra 15% of your gains would potentially outweigh the tax difference).

My current plans are to wait until everything I hit goes long term, and sell anything with a profit showing. But I move stocks on occasion, and have no faith that congress is reasonable, responsible, or capable of quick and useful action... YMMV.

Posted by: ertdfg | Oct 22, 2012 6:12:44 AM

Does all this blather apply to shoe-boxes under the bed, or mattress stuffing?

Posted by: AD-RtR/OS! | Oct 22, 2012 8:45:08 AM

Now is the time to sell. Before the election the stock market will be monitized. The problem is where to put the money. If Romney wins pipelines might be good. If Obama probably tax free municipals.

Posted by: Huggy | Oct 22, 2012 10:28:39 AM

You can take to the bank Romney will win but the market will no do as good as this year.......pipelines look like a good bet and have only a lean stock the market will not produce as well as bonds and can bank on it. What do you think Woody will like this result....

Posted by: Sid | Oct 23, 2012 6:47:08 PM