TRADE THIS STOCK?
THE MATHEMATICS OF SHOULD I SELL THIS STOCK
AND BY ANOTHER IN A TAXABLE ACCOUNT Trading stocks for a profit is anything but an exact science. Mathematics, however, can be applied to help the investor/trader analyze the opportunity presented and the cost of the decision to sell one security and to buy another. That cost the sale of an appreciated investment is made up of four measurable factors:
- Capital Gains Taxes.
- State Capital Gains Taxes.
- Broker’s commission
- Trading spread (mark down).
Taxes and commissions reduce the funds available for reinvestment and so the investor must do better with less money in the next investment. The goal here is to define how much less will be available for reinvestment, and how much better than the prior investment the new investment must increase in value for the investor contemplating the trade to break even? My idea was to create an Excel spreadsheet template that can be used to determine how much better the stock you plan to buy must perform to make up for the tax and transaction costs of the sale of the stock to be sold to raise the cash for the purchase. Enter the purchase price - cost basis - of the security to be sold in the proper column for long term (over 1 year), or short term gain. Next, enter the anticipated sales price. Hold ctrl + and backspace and the worksheet will tell you the tax and transaction costs of the sale and how much more appreciation you need to realize above the anticipated appreciation of your current holding just to break even. You may need to adjust the marginal Federal Income Tax Bracket. The worksheet uses 28%, the alternative minimum tax marginal rate. Your marginal rate may be as high as 35% - just change the figure and then hold ctrl + and backspace to recalculate, and the spreadsheet’s formula will do the rest. Some taxpayers may need to lower the Ohio Income Tax rate. Capital gains in Ohio are taxed at the same rate as ordinary income. Those using wrap fee accounts will want to reduce the transaction cost to 0.2% for the market spread only. Remember there will be a market spread and there may be trading commission on the replacement investment and you should factor that into your transaction cost. Click Here to download a copy of the spreadsheet (This spreadsheet requires that you have either Microsoft Excel)
John W. Eilers
Wood & Lamping, LLP
(513) 852-6079
jweilers@woodlamping.com |
