AAPL & Capital Gains: A Look at Tax Strategy

| Analysis

This is a technical article aimed at people who own Apple stock. If you own Apple stock, and live in the USA, you need to know something about capital gains which must be paid on the sale of any stock. This information might save you some money, possibly a lot of money, but you have to take advantage of it in 2012. If you aren't a current shareholder of stock, don't waste your time reading this, but if you own some APPL and have held it for some time, this is stuff you should know.

Five year Chart of Apple Stock

Five years ago today AAPL was selling for $167.86 and now it's worth around $635. With the stock dropping nearly $70 in the last three weeks or so, if you feel that AAPL is a good stock and will eventually go much higher, one possible strategy would be to sell it now, and re-buy it at the same price. Doing so could save you money.

The Wonderful World of Capital Gains
If you're confused, welcome to the world of capital gains in America. Here's the theory and the law. If you bought stock and held it for a year or longer it's sale is considered a long-term capital gain. If you bought and held for less than a year the sale incurs short-term capital gains. Each are taxed differently.

The reason for this article is that the amount you'll pay in capital gains is set to rise considerably in 2013. By taking and paying tax on your capital gains this year, you can save money. I know that there are a lot of people —like me for instance— who bought at fairly low prices and have held the stock for years. The more you have, the more this will affect you.

Long-Term Capital Gains
Let's take a theoretical stock that you bought for $10 and held for over a year. Now it's worth $100. If you were to sell it you'd incur a capital gain — the difference in price between what you bought and what you sold it for — of $90.

Currently if your total income including the capital gain on sold stock puts you in the 25% tax bracket, your capital gain on that one share of stock is 15%, plus whatever the capital gain rate in your individual state may be. For me that $90 would cost me 15 percent or $13.50 owed to the Federal Government. In addition, I live in New York State where the top capital gain is an additional 8.9 percent or $8.01. My total capital gains tax would be $13.50 + $8.01 = $21.51. So my real after tax long term —money in my pocket— gain would be $90 - $21.51, or $68.49. If you have 100 shares just tack on some zeros.

Next Year Will Be Worse
Let's look at what will probably happen in 2013 on the same sale. Note that there is no guarantee that rates will be what I specify, but the Bush tax cuts are due to run out and the new medicare program is due to roll in. If this doesn't happen on day one of 2013, I think it's a safe bet to say that they eventually will be in effect and no one believes that capital gains will get lower. I'm going with what is scheduled to happen as of now.

Long-term capital gains are expected to increase from 15 to 20 percent and an additional 3.8 percent will be tacked on for the new medicare program. So that's an increase of 8.3 percent, taking the 15 percent it is in 2012 and turning it into 23.3 percent plus state tax which we'll leave constant.

If you sold in 2013, it's more than possible that you'd owe the government 23.3 percent of the $90 gain or $20.97. Add to that the constant state tax —at least in New York State— of 8.9 percent or $8.01 and you'll be paying $28.98 instead of $21.51, or an increase of $7.47 per share. If you live in a state with no state tax, like Florida, congratulations you avoid state tax entirely.  But that $7.47 increase can be considerable if you have a good deal of stock, and these numbers are just simple examples.  If you held AAPL for any real amount of time, your increase in worth is much better than $90 per share.

Looking at the Short-Term
I'll quickly go over short-term capital gains, but if you look back a year, Apple is just about the same price as now, so this won't help you very much. Capital gains on short-term holdings are considered to be the same as any other type of income, so if you're in a high bracket you're paying 25 percent plus state tax.

As far as I can tell, the increase in 2013 will be the 3.8 percent medicare add-on. So the short-term capital gains on the $90 is $22.50 plus state tax that we'll keep at 8.9 percent, or $8.01, to total $30.51. This leaves $59.49 in your pocket in 2012 or adding 3.8 percent, brings the 25 percent to 28.3 percent or $25.47 + $8.03 = $33.50, an increase in real dollars of $2.99.

The price you buy a stock is considered the floor for tax purposes. Let's say you sell the stock for $100, making a pre-tax $90 gain, and buy it again for the same $100. You owe capital gains on the $90, as long as the sale is done in 2012, and your new tax floor is $100 not $10.

If you believe that the stock will go up —and I'm not advising anyone that AAPL will go up since I'm not a financial advisor and there are laws about such things— but if you think that AAPL is a good investment, you might want to sell what you have in 2012 and buy it back at as close to the same price as you can; thereby raising your tax floor.

So going back to the example of the stock bought for $10 and sold for $100 grossing a $90 profit; if you sell at $100 and buy at $100 paying the cheaper 2012 capital gains, your tax floor is now $100. If it goes up to $150 and you sell in 2013 or thereafter, holding it for a year or more, your gross taxable gain is $50 instead of $140. You'll pay a higher tax on a lesser gain than if you just held all your stock until next year.


Hurts So Good
If you have a large capital gain by doing this, you'll have to come up with the money to pay the taxman in April or, if you pay quarterly estimates, in January. Let's take a crazy but not unrealistic case. Someone bought AAPL in 1996 when there was a 50-50 chance that Apple would be out of business by the end of the year. That person bought 100 shares at $28 taking a huge gamble. Since then the stock split giving him 200 shares. Then it split again giving him 400 shares at a price floor of $7.00 per share. ($28/4) Now the price of a share is $637. So he has a gross profit of $630 per share times 400 shares or $252,000. Congratulations! He made nearly 10,000 percent.

But the tax man is coming to call. $252,000 X 15 percent = $37,500. The state comes along at its 8.9 percent or an additional $22,428 giving him a total bill of $59,928 for 2012. Pretty scary. But if he did the same thing in 2013, some leading economists say that the addition of 8.8 percent will add another $22,176 bringing his total to $82,104 payable to the Fed and State. Now it's true that he made a fortune but it's all tied up on paper.

So in this example, selling and buying 400 shares in 2012 at $637 will ring up a tax bill of nearly $60,000. Can he come up with $60,000 right now? Even knowing that next year doing the same thing will force him to come up with over $82,000 and he'll bask in the warm glow of netting $192,000 after tax.

That doesn't help if he believes the stock will do even better. If he sold and bought, he still can't buy a latte since it's all on paper. However he has reestablished a tax floor of $637 rather than $7 and when it does come time to finally sell for good, it'll feel better sitting down when the taxman comes again.

What Can You Do About This?

There are three ways that I can see out of this morass. None of which are pretty.

  1.  Buy back 94 less shares, the difference is about $60,000 and that will pay the tax.
  2.  Liquidate something. If you're well heeled bite the bullet and pay the tax.
  3.  Get a bank loan. If you can negotiate a rate way lower than 8.3 percent, the difference is in your benefit.

On one hand this is a problem that everyone should have since you've made a truck load of money. On the other hand, it's no fun to have to come up with taxes that will most assuredly hurt. But who says life is easy?

The take-away from all this is that time is running out for those with some or many AAPL shares, and using this strategy you might save some money in the long-run.

Any questions?

Note that the author is a holder of Apple stock, and to him, this is a lot more than theory.

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4 Comments

skipaq

Or one could have set up a Roth brokerage account and purchased Apple stock looking forward to retirement. smile

accountant

Please Google what a wash sale is before taking this guy’s advice.

David Winograd

A wash sale is exactly the opposite of what I wrote about.
It involves restrictions on selling at a loss.
If you read my article it talks about selling at a gain, and hopefully a large gain.

Bruce

I have 200 shares of AAPL with a basis of $8.50 per share. Potential gain at todays prices is $125,000. Tax would be $31,250 to Federal and State of CA.

With all due respect to the author, I would not recommend doing this strategy for the following reasons:
1) While the Bush tax cuts are due to expire in December, there is the real possibility that they will be extended. If Romney wins the election, I’m sure they will be returned to the present level or even possibly reduced even more. Never rely on anyone who tries to predict the future when it comes to taxes, especially me.
2) A change of 5% or less is not enough of a difference in tax rates to get me
to recognize the income and pay all that tax if I don’t have to. I live in CA so I would be paying at least 25% of any gains in Fed and State taxes. Paying
$31,250 today to possible save $6,000 in the future is not a good bet in
my opinion.
3) What happens if the stock tanks in the next year and you decide
that you want to sell. You have recognized all this gain in the current year.
You then sell the stock at a significant loss. You can only deduct the loss
at the rate of $3,000 per year assuming you have no other gains to offset.

I would only consider doing this only under the following situations:
1) You feel that Apple will continue to drop in price. Never be afraid to sell
a stock that is on its way down just because you don’t want to pay the tax.
2) You have other investments that have large loss positions. Use the losses
to offset the gains and you would have 0 tax liability. You can then immediately buy back the Apple stock with an increase in basis without incurring any tax.
Remember, the Wash Sale rules only apply to losses and not gains. If you want to reacquire the loss investments, you will have to wait the 30 days.

This is just my opinion. I could be wrong.

About me. BS in Accounting, MS in Taxation, CPA, Retired IRS Agent.

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