Tax ramifications of selling stocks

[aboz56]

I have around 50 shares of company stock from a previous employer, which were purchased with after-tax funds at a 15% discount and also under the premise that I would pay taxes on the 15% discount if I sold the shares before holding them for two years (not even sure what that means, if someone wants to explain, I'm all ears). I want to go ahead and move the stock and it hasn't been two years. My question for somebody who knows, what are the repercussions tax wise on selling stock in general? In other words, I don't want a big surprise come tax time next year. I believe the total value of these holdings is around $1,400 or so, nothing big, but a solid chunk of change that I'd like to have and I also want to make sure I'm aware of all of the factors so I don't get any surprises.

 

Kap, Mike, Jas?

[Chisoxfn]

I don't do taxes, but if you sell after two years you get to sell them at the 15% Capital Gains rate and if you sell them before than you'd pay taxes on them as if it were normal income (which would be whatever your tax bracket is and that would be a higher percent).

 

I'm pretty sure those are the exact details, but if ChisoxRd is around he could tell me for sure (because I despise taxes and even though I'm an accountant I have a friend at my firm do them for free for me).

[DBAHO]

Well you'll have to definitely pay Capital Gains Tax when you sell shares. Don't know what it is up there, but down here if you sell after you hold it for a year, only 50% of it is taxed.

 

Usually you work out how much CGT you have to pay through indexation or discounting I think is the other method.

 

Also depends on your marginal tax rate as well I think IIRC.

 

Here's a good summary of it;

 

http://en.wikipedia.org/wiki/Capital_gains_tax#United_States

[NorthSideSox72]

I don't do taxes, but if you sell after two years you get to sell them at the 15% Capital Gains rate and if you sell them before than you'd pay taxes on them as if it were normal income (which would be whatever your tax bracket is and that would be a higher percent).

 

I'm pretty sure those are the exact details, but if ChisoxRd is around he could tell me for sure (because I despise taxes and even though I'm an accountant I have a friend at my firm do them for free for me).

I can confirm this, I've done it myself. Company stock purchased via ESPP like that you pay taxes on them like they are income, if you sell within 2 years. After that, its capital gains, at that rate only. Your income tax rate depends on your income. The income tax could really bite you in the rear if you sell early.

 

Careful also of cost basis. Was the LAST purchase less than 2 years ago, or all at once at some point? If it was periodic purchase, some of the purchases may have come longer ago. Look into your trade dates.

[Jenksismyhero]

I can confirm this, I've done it myself. Company stock purchased via ESPP like that you pay taxes on them like they are income, if you sell within 2 years. After that, its capital gains, at that rate only. Your income tax rate depends on your income. The income tax could really bite you in the rear if you sell early.

 

Careful also of cost basis. Was the LAST purchase less than 2 years ago, or all at once at some point? If it was periodic purchase, some of the purchases may have come longer ago. Look into your trade dates.

 

You sure it's two years? I thought it was only one?

[NorthSideSox72]

You sure it's two years? I thought it was only one?

Per Turbotax's site, its 2 (page down to the scenarios).

[southsider2k5]

You sure it's two years? I thought it was only one?

 

Working in trading, I know it is two years, because we use that as a selling point to trade commodities.

[Jenksismyhero]

hmm, my federal income tax law book is wrong...

[aboz56]

So how would I go about figuring my liability?

[southsider2k5]

So how would I go about figuring my liability?

 

Did you get the 50 shares all at once, or at different times?

 

Also did the company leave you specific instructions upon your separation from them about how to sell the shares? Some companies require you to divest the shares through them, others let you take care of it youself.

 

Basically you have to figure out your entry point (much easier if it was only one trade, versus say 5 different buys of 10 shares each all at different prices), and subtract that from where you sell the stock at. If you get a negative number, you take it as a loss on your taxes, if it is positive it gets added to your AGI and taxed accordingly.

 

The 15% comes in as a tax penalty designed to make people long term holders of a companies shares, instead of effectively using the 15% discount as an instant bonus. It also encourages employees to stay with companies, as they have some money riding on their length of employment.

 

In reality it won't be a huge hit on your taxes, even if you made a nice percentage profit. You'll probably lose more through the penalty than the taxes.

[aboz56]

Mike,

 

I had two different dates I bought:

 

12.31.2005 - bought 30 shares at $17.85

6.30.2006 - bought 21 shares at $19.23.

 

Stock is currently trading at 26.20...

[southsider2k5]

If you really want to know what I think, I would wait until July 1, 2008. On that date, not only does your tax liability drop from your normal bracket to 15% capital gains, but you also don't pay a 15% penalty.

 

Tax liability would be as follows, assuming you sell at 26.20.

 

26.20-17.85=8.35 X 30 shares = 250.50

26.20-19.23=6.97 X 21 shares = 146.37

 

total profit = 396.87, which would be added on as income and taxed accordingly At the 28% bracket you would end up with 111.12 in taxes. If you waited until July 1, 2008, you would only pay 15% in capital gaines taxes, which would be 59.53 in taxes.

 

For penalities you would actually need to know what the stock was trading at the day you bought it, and subtract the purchase price from that number. The difference is the penalty you would have to pay back to the company for early divestature.

[aboz56]

If you really want to know what I think, I would wait until July 1, 2008. On that date, not only does your tax liability drop from your normal bracket to 15% capital gains, but you also don't pay a 15% penalty.

 

Tax liability would be as follows, assuming you sell at 26.20.

 

26.20-17.85=8.35 X 30 shares = 250.50

26.20-19.23=6.97 X 21 shares = 146.37

 

total profit = 396.87, which would be added on as income and taxed accordingly At the 28% bracket you would end up with 111.12 in taxes. If you waited until July 1, 2008, you would only pay 15% in capital gaines taxes, which would be 59.53 in taxes.

 

For penalities you would actually need to know what the stock was trading at the day you bought it, and subtract the purchase price from that number. The difference is the penalty you would have to pay back to the company for early divestature.

Thanks for the explanation, I think I'll hold onto it.