By Jerry Coon
December 31 is fast approaching and when the clock strikes midnight on the 31st, no, we don’t all turn into pumpkins but we do lose the ability to affect our tax situation by selling capital gains assets such as stocks and mutual funds. There are still a few moves we can make after December 31, such as contributing, if qualified, to an Individual Retirement Account, but selling stock on January 1 isn’t one of them. That January 1 sale gets reported on the 2021 tax return while December 31 sales go on the 2020 return. Next week, we will go over some last month/day things that must be completed by December 31. However, this week, let’s look at a stock sale and discuss the tax consequences thereof.
Taxpayer DF purchased 100 shares of Consumers Power Company common stock on July 1, 2020 when he received his refund from his 2019 tax return. He paid $50 per share for a total of $5,000. DF’s cost basis in the stock is the $5,000. DF tells his investment advisor to sell the stock on December 30 when the stock price is $60. His proceeds from the sale is $6,000 and the profit is $1,000. Since DF owned the stock for less than 6 months, the $1,000 profit is considered short term profit. Short term profit is taxed as ordinary income. If GF’s income is taxed in the 12% tax bracket, the $1,000 profit is also taxed at the 12% rate. He would pay $120 in tax on the profit.
Now let’s change GF’s purchase date back to July 1, 2019. He still sells the stock on December 30 and his profit is still $1,000. However, since he now has held the stock for more than one year and one day, the $1,000 profit is taxed at the long term capital gains rate. Since GF is still in the 12% tax bracket, his long term capital gains are taxed at the exceedingly favorable rate of 0%. That is not a misprint. The Tax Cuts and Job Act ensured that long term capital gains profits are taxed at a very low rate through 2026. I say “ensured” because it will stay that way through 2026 only to the extent that Congress doesn’t change the law in between now and then. Let’s keep our fingers crossed that Congress deals with other items and leaves the long term capital gains rates at the favorable rates we enjoy now.
There is another tax advantage option available to taxpayer GF. Let’s say GF normally gives a $6,000 check to his favorite charity in December. He could give the stock to a non-profit of his choice and GF would get a charitable deduction for the full fair market value of the stock-$6,000. GF doesn’t pay tax on the $1,000 profit but does receive a charitable deduction for the whole amount. Many taxpayers own stocks that they have owned multiple years and the built-in capital gains profits almost act as a detriment to selling the stock. Perhaps for the taxpayer that also makes charitable contributions, making donations of these stocks and getting a deduction at full fair market value might be something worth considering. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent for Integrity Tax Group on Northland Dr in Rockford. Contact Jerry at RKD@integritytaxgroup.com.