Today’s article aims to provide a perspective you may not have considered when considering whether or not to sell an appreciated asset, in the face of potentially significant taxes.
As you may (or may not) know - generally, if you’re investing outside of a retirement account, whenever you perform certain actions (usually liquidation of an asset in some form) you will likely owe taxes on the profit, if any.
In the hypothetical scenario where you bought something, let’s say some quantity of a stock, some period of time in the past for a much lower price than what it’s worth today, you’d be considering selling the stock today for a profit.
As you consider selling it, one thing holding you back may be a potentially enormous amount of taxes you will owe on the profits when you sell it.
I’m not necessarily advocating for or against selling it, but recently I had the realization that even if you’re sitting on a nice unrealized profit now, there is an uncertain “cost” to holding the asset - largely dependent on its volatility.
For the purposes of easy calculations, let’s say if you sold that stock you’d make $100k in profit.
At a 20% tax rate, that means you’d owe $20k in taxes and net a profit of $80k.
However, if the asset is something like a stock, there is an inherent volatility to the asset - it’s possible the value could continue going up, or it could go down.
By not selling, you risk the value of the stock going down, which will eat into your profits.
While a 20% downside may not happen every day for most stocks, it isn’t unheard of, and if that 20% downside were to occur before you decided to sell you’d generally be worse off that if you’d sold and paid the $20k in taxes (because you’d only be selling for $80k in gross profit, which would be about $64k in net profit after the 20% tax you’d still have to pay).
Like I said earlier, I’m not advocating for or against selling an appreciated asset, just calling to attention the fact that while there may be a certain “loss” if you sell (in the form of taxes) if you don’t sell there’s a certain “loss” in the form of taxes owed and also an uncertain “loss” in the form of the asset’s underlying value decreasing.
So, if you’re considering selling something, keep these uncertain losses in mind.
If you feel there are events on the horizon that could negatively affect the value of the asset, maybe selling all (or a portion of it) and paying the certain taxes is less “risky” to you than holding the asset and risking the uncertain decrease in value over some period of time.
Whatever the case, hopefully you now have one more thing to consider when selling assets than you did a few minutes ago and can use it to better prepare for your financial future.