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I have $2.5k in a mutual fund that has a 30 minimum holding period - to avoid fees. It's been 30 days and I've netted about $150 on the position. I understand that the purpose of mutual funds is for long term investments. And I am interested in the long term investment.

However, if I wanted to sell and secure the $150 and immediately buy back $2.5k at a higher basis, would that be less effective than continuing to hold the position given the same scenario? Or does the higher cost-basis have far less effect than holding the original position?

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It is my understanding the CGT in the US is much lower on long term holdings - here "long term" means more than one year.

If you keep resetting the cost basis like this you run the risk of falling into the higher rate when you finally sell. Why not simply sell $150 worth of the units and leave the remainder at the original purchase date and cost basis.

$150/2500 = 6%. Without further details, you are making a capital gain of approximately 6% on $150, which is about $9. A $9 declared capital gain is hardly going to break the bank. Once you have passed the one year threshold for long-term capital gains, then you can consider the benefits of rebasing the costs.

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  • I don't understand your math on the 6%/$9. He already has a capital gain of $150. – BrenBarn Jun 20 '16 at 17:32
  • @BrenBarn He doesn't have a declarable $150 cap gain if he only sells $150 worth of units. He sells 6% of the holding on which he has made a 6% profit. If he were to sell the entire holding in order to rebase his costs then yes, he would have a $150 capital gain, but I am suggesting he does not sell the entire holding, just $150 worth. – user41790 Jun 20 '16 at 17:36
  • Ah, now I see what you're suggesting. But not sure I see the point of it. If the goal is to reset the basis, selling just $150 won't achieve it. And although as you say the capital gain won't break the bank, that's because the gain is so small that it doesn't meaningfully "lock in" very much gain or a higher basis. – BrenBarn Jun 20 '16 at 17:40
  • @BrenBarn The benefit of leaving the bulk of the holding in place is to take advantage of the lower capital gains tax rate for "long term" holdings. If the holding is sold before one year, the CGT rate is 33-45%, while if it is held for at least one year, then the CGT arising from rebasing costs will be less than half of that - about 15%. – user41790 Jun 20 '16 at 17:45
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The difference between selling and rebuying vs holding is that selling now means you will have to pay taxes on the gain at the short-term capital gain rate, while if you hold more than one year you pay the lower long-term rate when you sell.

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