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This is my first year diving into stocks. Individually, I own around 10 different stocks, and one or two of them seem to be doing much better than others. I believe I would like to sell some of the ones that aren't doing so hot, and reinvest them into some of the others that are.

I believe this is what is referred to as "re-balancing" my account, is that correct? In any case, what (if any) impacts will this have on my taxes next year? Will I have to pay taxes on the money I make off selling the stocks even if all that money goes into another stock? If that's the case. Then perhaps it would be better not to sell them, but to simply purchase more of stocks which are doing better, and leave the others alone?

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    Tax questions need a country tag. Also, what kind of accounts are you referring to? – Chris W. Rea Jul 13 at 23:07
  • Most countries levy Capital Gains Tax on profit made from selling shares (and other assets). – curiousdannii Jul 14 at 2:31
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one or two of them seem to be doing much better than others. I believe I would like to sell some of the ones that aren't doing so hot, and reinvest them into some of the others that are.

I believe this is what is referred to as "re-balancing" my account, is that correct?

When people talk about rebalancing their investments they usually do the opposite to what you propose.

  • Lets say that you believe that 1/3 of your investments should be in the tech sector, and 1/3 in healthcare, and 1/3 in foreign stocks.
  • Now a year later the tech stock are doing great and the foreign stock aren't doing so well. So now the tech/health/foreign split is now 50/30/20.
  • If you are going to rebalance you will sell some of the tech shares, and buy more foreign shares, and maybe invest a little more into the health sector.
  • This means you are selling high, and buying low.

Now this is different than saying company x has reached a criteria, and I have decided that means I should sell. Rebalancing moves you back to an asset allocation you want to maintain.

The tax implications depend on the time frame you have owned the shares, and the type of account.

Will I have to pay taxes on the money I make off selling the stocks even if all that money goes into another stock?

I have not heard of a plan that forgives capital gains taxes on the sale of shares because the money is used to buy more shares of another company. I do know that some retirement accounts can defer taxes until retirement, or can even be tax free. But in those cases the tax treatment doesn't depend on what happens to the proceeds as long as they remain in the retirement account.

Then perhaps it would be better not to sell them, but to simply purchase more of stocks which are doing better, and leave the others alone?

Sometimes people who are going to rebalance, and don't want to deal with tax issues, change how they invest new money. They buy shares in the lower performing sector, and no shares in the better performing sector until they bring the asset allocation back into alignment.

Yes rebalancing can be counter-intuitive.

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(Assuming United States.)

If you sell stocks that you've lost money on within a year of buying them, that's a short-term loss that reduces your taxable income. If you sell stocks that you've lost money on more than a year after you've bought them, that's a long-term capital loss that reduces your capital gains and up to $3,000 in losses can be deducted against ordinary income.

The reverse is the case if you sell stocks you've made a profit on. Stocks held less than a year produce ordinary income. Stocks held more than a year sold for a gain produce long-term capital gains that are typically taxed at a lower rate than earned income.

People with high tax rates commonly sell stocks that they have a loss on within a year of buying them to materialize the loss as an ordinary loss. People with high tax rates commonly sell stocks they have a loss on before the end of the year to get a tax deduction for that year.

Just be warned, you can get in trouble if you buy and sell the same stock (or substantially similar stocks) within 30 days, even if you do it in different accounts.

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  • What trouble did you mean to imply? The wash sale rule? – user2371765 Jul 14 at 18:35
  • Yes. It can be surprisingly complex, particularly if you trade in multiple accounts or you and your spouse both trade. – David Schwartz Jul 14 at 18:41
  • What if I am single and I buy and sell in my individual account and traditional IRA respectively? Will the rule still be triggered? Also, when the trades settle one will be able to subtract losses from the gross profit, right? – user2371765 Jul 15 at 6:18
  • Net capital loss is deducted up to $3k, and over that carried forward, regardless of short/longterm. But if carried forward and applied against gains next year, term may matter for that. If you sell for a loss and buy the same or similar within 30 days before or after, the wash sale rule delays your loss recognition, but you don't get imprisoned or anything really serious. @user2371765: if you sell in the IRA neither gains nor losses are realized for tax; if you sell outside and buy in the IRA yes wash sale applies, and in this case you don't just defer the loss but lose it. – dave_thompson_085 Jul 15 at 8:04
  • @dave_thompson_085 Suppose I shorted a stock outside and closed my position at a loss. Then I shorted again outside at a higher price and closed the position when the stock price fell. Simultaneously, I opened a position in the same stock in my traditional IRA when the stock price fell. All of this happened in 30 days. What happens to the initial loss? Is it recognized when all the positions are closed and 30 days have elapsed? – user2371765 Jul 15 at 9:09

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