Most cost effective way to realize profits?

Question

Selling a security at a loss is subject to wash sale rules in the US, but selling a security at a gain is not. While they are rare, there are a few situations in which an investor might want to realize a profit of a security while continuing holding it. The investor can then sell the security and immediately buy it back. The costs associated with this approach are commissions and the market spread, which can be sizable given that the investor doesn't actually change their positions.

What is the most cost effective way of realizing a profit of a security? Is there some way of doing this without paying normal commissions and/or market spread? I.e., is there some way to "reset" the cost basis without actually selling the security?

Answer 1

I.e., is there some way to "reset" the cost basis without actually selling the security?

For some positions there is, for example PFIC MTM treatment. But these are exceptions, as a general rule there's no such way.

I'm finding it difficult to imagine the scenario though. You'll be resetting not just the cost basis but also the holding period - which may lead to higher taxes if you decide to liquidate the position at a further gain before the long term capital gains kick back in. This may also negatively affect qualified dividends. And last but not least - this will bring a significant expense of the capital gains tax on the recognized gain, unless the position is so small and you have no other income, leading it to being a tax-free disposition (in which case it would make sense, but the associated costs would also be small).

It may be an "XY problem" question. What is the actual goal?

Answer 2

No idea from a tax perspective, but if you wanted to realise profits, you would sell a portion of the shares until the value of the holding is the same.

So, if you start with $10,000 worth of shares, and the share price increases, and it's now worth $12,000, you would sell 17% of the shares, you take $2000 as pure profit, and the value of your holding would be back at $10,000.

Again, unsure of the tax implications of such a move.

Answer 3

The most cost effective way to take a profit is to get the long-term capital-gain tax rate.

But if using a covered-call to exit the position, the covered-call needs to meet "qualified" rules or else the entire position goes as a short-term capital-gain.

However, a bullion ETF gets a collectible tax rate of 28% if held one-year or longer. So compare the collectible tax rate to the investor's short-term capital-gain tax rate .