My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.

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Tax Conscious Stock Sale: A Case Study

Contributed by mm | October 30, 2007 6:32 PM PST

I wrote a couple of weeks ago about why some basic tax knowledge will not only help you to maximize your tax refund after the fact, but will also serve as good guidance on how one should plan financial activities beforehand. Case on point: my exit strategy on my investment in Apollo Group, Inc. (APOL).

For those of you who don't know, Apollo Group is the operating of University of Phoenix, Inc. (UPX), an accredited university with predominant online presence, and many other educational institutions. I bought 400 shares of its stock at $35.07 apiece on November 20, 2006, following strong recommendation from Morningstar equity research's recommendation. (In retrospect, I bought the stock almost at its 3-year nadir. What a perfect timing!)

Now the stock APOL is trading at over $75 apiece and I'm happily watching my original investment of $14,000 turned out to be another double-bagger. Apparently the stock is no longer cheap at 22 times forward P/E. In fact, in my latest monthly portfolio review, I have listed my target (sale) price of APOL as $65, but I still haven't sold the stock yet. Why?

It is all about tax consequences.

With over $16,000 unrealized capital gain, if I sell today, such gain will be classified as short-term capital gain, and is therefore subject to my tax bracket of 33%. That would mean the $16,000 before tax gain will shrink to $10,720.

On the other hand, since I bought the stock on November 20 of 2006, if I can be patient enough to wait another three weeks, the $16,000 gain, if it is still there, will become long-term capital gain, and I will only have to pay 15% tax and keep $13,600. That's almost a $3,000 difference!

I am usually not timing my sales this way, knowing fully the market can have unexpected and unfavorable developments any time. But this is a classic example where a tax-conscious tax sale may work. That is because:

1) A 20-days wait means $3,000 more to keep for my nest egg
2) APOL's quarterly earning release was out last week, so there is no short-term catalyst for a price correction except for a market-wide sell-off
3) And I won't be worse off anyway unless the stock loses $7.50/share (10%) or more in the next 20 days.

Make sense?

P.S. I bought a lot of Citigroup (C) stock this month albeit the price decline. 5.1% dividend yield is becoming yummy and I'm optimistic that the financial titan will survive the credit market turmoil and becomes stronger (and it will be helped now that Fed is likely to loose the interest rate over time).

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This Post Has Received 19 Comments. Share Your Opinions Too.

James Commented on October 30, 2007

If you are after a financial bank stock with big dividend, WM is another one, although there's a rumor that WM will cut the dividend amount.
Recently I also bought a lot of C and WM stocks and March 08 calls.

Deborah Commented on October 30, 2007

Mike Commented on October 31, 2007

What's a March 08 call?

JBW Commented on October 31, 2007

Because if you wait to sell it until after November 20th, it will be taxed as a long-term capital gain rather than short term. 15% versus ?

JBW Commented on October 31, 2007

I answered without peeking.

Juan22 Commented on October 31, 2007

Congrats on getting that right.

Creative Investor Commented on October 31, 2007

Excellent post about balancing tax consequences and stock selling decisions. As for Citigroup, I'm not that bullish about it. Even though I'm sure it will survive the credit market turmoil, with this stock you really don't know how long it will be moving sideways before it reaches its intrinsic value.

If I had to chose a bank stock with a nice dividend, I would probably go with Bank of America or Wells Fargo instead of the Citigroup.

Dan Commented on October 31, 2007

The stock's up to 79 now and the Nov 75 put costs 1.00. For $400 plus commissions, you can lock in your $75 sale price. If the option stays out of the money, then you get to write off the $400 against your gains.

Dave Allen Commented on November 1, 2007

Told you to beware of financials.

Oh swell.

Mike Commented on November 1, 2007

yeah, Citi's down 6 percent today.

Dave Allen Commented on November 1, 2007

Mike, financials are going the way of the homebuilders - single digits.

I expect them to stop or lower dividends moving forward.

MM Commented on November 1, 2007

Now I know my heavy financial expoure is getting slaughtered today ... maybe we can tae a long term view to see what happens.

Maybe I can also report back with a loss-capturing sale by December ... also tax conscius.

Dave Allen Commented on November 1, 2007

This is just the start.

Creative Investor Commented on November 1, 2007

Dave Allen: I highly doubt financials will stop paying dividends, they have plenty of cash on hand and they will do just fine in the long-term.

MM: Instead of taking a loss, you might also consider averaging down and increase your stake in the financials by buying them on the cheap.

MM Commented on November 1, 2007

Yes, I'm just planning to take a loss for tax reasons, so essentially I will just sell C and buy BAC on the same day so I can write off the loss in my 2007 tax return.

TB Commented on November 4, 2007

If you sell it in November, you have to pay taxes in April of 08. If you wait till Jan 2 to sell it, you get to defer taxes for another 14 months.

Russ A Commented on November 5, 2007

This is the main reason I do most of my trading in within my Roth account. If somethings heads up nicely, it doesn't matter by how much - I never see any capital gains taxes. The only thing I worry about is trade price of $11 :)

HarryPotter Commented on April 6, 2008

From the beginning your blog was trash. But now it is great. I hope you gonna keep writing that way.

noname Commented on April 9, 2008

I’ve tried to think it over and I guess this is just a rumor. I hate rumors that ruin private life so advise you not to believe it and leave your comments by yourself.

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