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Assuming the following:

  • I receive a stock grant with a value of $10,000
  • My current taxable income bracket is 25%
  • My capital gains tax bracket is 15%

Comparing the following:

Scenario 1:

I sell the $10,000 worth of stock, take my $7,500 and re-invest it. The stock doubles, and then sell after a minimum of 1 year, I pay 15% on the increase and end up with a gain of $6,375 + the original $7,500.

Scenario 2:

I avoid selling the stock when they're granted, and it doubles over the next year, I cash out the same base ($7,500), but after tax the capital gains tax, my profit would be $8,500 + the original $7,500.

So if I avoid cashing out the stock (and wait 1 year for long term capital gains) - given that I have a higher initial investment value ($10,000 vs $7,500) it seems that I can expect higher gains.

Is this correct?

  • Re-wrote the question to organize the information a bit – Chris Apr 1 '16 at 20:44
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    In scenario 2 there is also some interest or at least opportunity cost to pay $2500 tax in the first year. But yes, if your investment return exceeds the cost of financing, then investing more is better; this is standard leverage. Of course it also increases risk if the investment doesn't do as hoped. Longer term the numbers are (usually) affected by inflation -- tax brackets are adjusted but your basis remains nominal -- but that's equally true for pretty much any investment. – dave_thompson_085 Apr 12 '16 at 9:45
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The biggest challenge with owning any individual stock is price fluctuation, which is called risk. The scenarios you describe assume that the stock behaves exactly as you predict (price/portfolio doubles) and you need to consider risk. One way to measure risk in a stock or in a portfolio is Sharpe Ratio (risk adjusted return), or the related Sortino ratio.

One piece of advice that is often offered to individual investors is to diversify, and the stated reason for diversification is to reduce risk. But that is not telling the whole story. When you are able to identify stocks that are not price correlated, you can construct a portfolio that reduces risk.

You are trying to avoid 10% tax on the stock grant (25%-15%), but need to accept significant risk to avoid the 10% differential tax ($1000). An alternative to a single stock is to invest in an ETF (much lower risk), which you can buy and hold for a long time, and the price/growth of an ETF (ex. SPY) can be charted versus your stock to visualize the difference in growth/fluctuation.

Look up the beta (volatility) of your stock compared to SPY (for example, IBM). Compare the beta of IBM and TSLA and note that you may accept higher volatility when you invest in a stock like Tesla over IBM. What is the beta of your stock? And how willing are you to accept that risk?

When you can identify stocks that move in opposite directions, and mix your portfolio (look up beta balanced portolio), you can smooth out the variability (reduce the risk), although you may reduce your absolute return. This cannot be done with a single stock, but if you have more money to invest you could compose the rest of your portfolio to balance the risk for this stock grant, keep the grant shares, and still effectively manage risk.

Some years ago I had accumulated over 10,000 shares (grants, options) in a company where I worked. During the time I worked there, their price varied between $30/share and < $1/share. I was able to liquidate at $3/share.

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