When is the right time to sell a stock? Should I give the stock to my heirs or a charity for their benefit?
When you have a stock with significant gains, is it better to sell the stock to realize the gains or give the stock and mitigate taxes? We are going to cover when the right time to sell vs give the stock is and exactly what the consequences of each are.
Realize the gains or take the deduction?
Selling stock with large capital gains produces a taxable event for the owner. The first step is to determine whether the gain is long-term or short-term as each is taxed differently. Long-term capital gains are taxed at more favorable rates, capping at 20%. Short-term gains are taxed at your ordinary income rates, which may be as high as 37%!
Another tax to beware of is the Net Investment Income tax of 3.8% on NII in excess of MAGI over $250,000 for joint filers. That means if you’re in the top capital gains bracket and have MAGI over $250k, you could pay a 23.8% tax on your gains from the sale of the stock! For some this makes sense, especially if you are preparing for retirement and need the funds to help accomplish your goals.
If you decide to give the stock to one of your heirs or a charity, there’s two things this accomplishes. The first is that if you give the stock to your heirs, your cost basis transfers over to them to calculate their gain. This removes the stock from your estate and potentially causes the sale to be taxed at a lower rate than if you sell it.
If you give it to a charity, you receive a charitable deduction equal to the fair market value of the stock, as long as you’ve held the stock for more than a year. Moreover, when the charity sells the stock, they won’t pay taxes on the gain either.
Selling or giving stock depends on your goals for both retirement and estate. This decision should not be made in isolation but rather how it fits within your overall plan.
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