Which stock to sell?

Question

Situation

I am based in the USA and own two stocks from the same company, one that I bought at a price of $50, and one that I bought at a price of $70. I have held each one for over a year, to avoid short-term capital gains tax that I would have to pay when selling. The current stock price is $80. I want to sell one of them. Which should I sell?

My thoughts

• Sell the one I bought at $70, in order to minimize the amount of capital gains tax I'll have to pay.
• Sell the one I bought at $50, as the stock price might continue to increase, and by selling the $70, I would have even more capital gains to pay when I eventually sell the $50 later.
• Makes no difference which one I sell, as I'll have to pay the capital gains on both eventually?

Answer 1

Time value of money implies that deferring taxes all else equal (assuming the same dollar amount now vs. later) is better. That would lead to wanting to sell the $70 basis shares to minimize gains if you expect your tax rate to be equal or higher in the future.

If you expect your tax rate to go down in the future, it might make sense to sell the $50 shares now. However, if you hold the remaining shares until your death, remember that there would be a step-up in basis for your heirs, which would mean holding the $50 basis shares (and selling the $70) is more beneficial in that case since it would get a larger step-up compared to the $70 shares.

Long answer short - it depends, but in general, minimizing current-year capital gains is often preferred.