What To Do With Highly Appreciated Stock.
“risk comes from not knowing what you’re doing.”
– warren buffet
By Shawn Perkins | Financial Planning
6 minute read
If you’re even slightly interested in the stock market, you’ve been hearing a lot about Nvidia this year. The semiconductor company has been the front-runner beneficiary of the AI hype, surging 152% so far in 2024, and is up over 600% in the past 2 years. Just look at how far ahead it is compared the Dow Jones, S&P 500, and Nasdaq this year:
If you’re a shareholder, you’re certainly happy with this kind of performance. But you’ve likely asked yourself at least once, what do I do now?
Well, you’re in luck. Here are a few things to consider doing with your shares of Nvidia, or any highly appreciated stock that you may have.
First, you must consider the purpose of these funds, your tolerance for risk, and your time horizon. Do you think you’ll need this money in a year or two? Does the thought of the stock dropping 20-30% scare you? Do you plan on leaving the shares to your beneficiaries? Whatever your situation is, you need to answer these types of questions first before deciding which route to take next.
If you hold your shares inside a retirement account such as a Traditional IRA or Roth IRA, you can sell your shares without any tax consequences. Whether you trim your position or sell out completely, you will not owe any taxes inside these accounts. In fact, if it is inside a Roth IRA, it is completely tax-free!
Use these proceeds to rebalance your portfolio and stay diversified.
If you hold your shares inside a taxable brokerage account, however, you’ll need to be cautious of taxes. If you’ve held your shares less than a year, any gain that you have at sale will be taxed as ordinary income. This would effectively be the same as earning a bonus at work. In other words, the more money you make as ordinary income, the higher you’re going to climb the ladder in taxes.
If you’ve held your shares for more than one year, you’ll qualify for long-term capital gains treatment. This is a much more friendly tax rate and is generally between 15%-20% for most people. It can be as low 0% if you have low enough income.
Wouldn’t it be nice to reduce or even eliminate your tax on the gain in this account? Well, if you have an investment in your brokerage account that is currently at a loss, you could sell that to offset the gain in Nvidia. Here’s an example:
By doing this, you could sell your 100 shares in Nvidia and your 100 shares of Stock A and generate $19,609 completely tax-free. This is called tax-loss harvesting and is an incredibly powerful tax planning tool for brokerage accounts. Having a loser sometimes comes in handy!
If you don’t have a loser to sell to offset your gain, don’t be discouraged. Having a winning stock in a brokerage account is a double-edged sword. As the value increases, so too does the tax liability. But don’t let the fear of taxes prevent you from making a move that brings you closer to your goals. After all, the only thing we know for certain is where the price is at today. Beyond that, greed can begin to influence our decision making.
Are you charitably inclined, or maybe you would like to be? If so, you could consider donating your highly appreciated stock to a charity. This does not mean selling the stock then giving them proceeds. That would involve paying taxes. This means giving the actual shares to the charity, then the charity will sell the shares afterwards. By doing this, you can donate the full value of your stock which maximizes your charitable intent. And by the way, your donation may allow you take a greater than the standard deduction on your taxes. Charitable donations count towards your itemized deductions on your tax return.
Don’t have a charity in mind right now? That’s ok. Ever heard of a donor-advised fund? That’s a blog for another day.
Lastly, if you’re thinking of giving your shares to someone, like your children or grandchildren, there are some things to keep in mind. If you are alive and well, giving your shares to your children or grandchildren is a great way to help them accomplish their financial goals and maximize the growth of compounding interest. It could also be a great way to slip past capital gains tax.
Remember when I said that you don’t have to pay capital gains if you have low enough income? Well, if you give your adult children or grandchildren your appreciated stock in Nvidia, and their income in 2024 is below $47,025 if they are single or $94,050 if they are married, they would pay $0 in capital gains tax.
There is another way to avoid capital gains, but unfortunately, you’re no longer in the picture. Upon your passing, if you leave your shares of highly appreciated stock in your brokerage account to your heirs, the gain that you had while living is eliminated. At the date of your death, the shares experience a “step-up” on their cost basis. Meaning it is as if your beneficiaries purchased the shares on the date of your death. This would allow them to sell the shares with $0 in capital gains.
And they will remember you fondly, of course.
So, what should you do with your shares? Nvidia is a great company and is certainly not going anywhere. If you’ve been fortunate enough to experience this incredible run, take a moment to think about your goals, your risk tolerance, and your options that I’ve discussed today. And while you’re at it, maybe read this too. Sometimes knowing when to walk away is the hardest decision to make.
More articles by Genuine Wealth insights
