Investing

sell stock to realize capital gains, then buy back?

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  • Dec 25th, 2020 6:47 pm
[OP]
Deal Addict
User avatar
May 8, 2007
1095 posts
331 upvotes
Fraser Valley, BC

sell stock to realize capital gains, then buy back?

I am becoming rather old, and have a lot of unrealized capital gains in stocks, but don't really need to sell them yet for income. My regular income is from pensions and dividends, quite low, 30K, but enough for all my normal expenses.

I am thinking I should sell some stock every year to get my taxable income increased to the 50K to 100K range. The tax rate at that level is tolerable. If I wait several more years before selling then I (or my estate when I die) will have to sell a lot more stock per year, or maybe all the stock, increasing my taxable income to several hundred thousand or more, where the tax rates becomes a lot higher.

So my idea is to sell a small amount of stock every year to get my income increased but taxed at reasonable rates, and then immediately buy back most of the sold stock, since the stocks remain good investments. I know this would be considered a "wash trade" in the case of taking a capital loss and disallowed for tax purposes, but I'm taking a capital gain and will be paying the proper tax. It is true however that I'm selling the stock every year for tax minimization purposes.

So is there anything about this strategy that seems to be a bad idea, or would seem questionable to CRA?
17 replies
Deal Fanatic
Apr 25, 2006
6443 posts
1344 upvotes
I think there is a period where you can't buy back the same stock.

Consult with google but they thought of this already.
"If you make a mistake but then change your ways, it is like never having made a mistake at all" - Confucius
Deal Addict
Mar 3, 2018
1985 posts
1990 upvotes
GTA
Selling to create capital gains and then buying back immediately is acceptable. Where you have issues is when you sell to create a capital loss. That loss wouldn't be allowed if you had purchased the same shares within 30 days before or after your sale.
Sr. Member
Oct 22, 2016
663 posts
563 upvotes
Comox Valley
adams7 wrote: I am becoming rather old, and have a lot of unrealized capital gains in stocks, but don't really need to sell them yet for income. My regular income is from pensions and dividends, quite low, 30K, but enough for all my normal expenses.

I am thinking I should sell some stock every year to get my taxable income increased to the 50K to 100K range. The tax rate at that level is tolerable. If I wait several more years before selling then I (or my estate when I die) will have to sell a lot more stock per year, or maybe all the stock, increasing my taxable income to several hundred thousand or more, where the tax rates becomes a lot higher.

So my idea is to sell a small amount of stock every year to get my income increased but taxed at reasonable rates, and then immediately buy back most of the sold stock, since the stocks remain good investments. I know this would be considered a "wash trade" in the case of taking a capital loss and disallowed for tax purposes, but I'm taking a capital gain and will be paying the proper tax. It is true however that I'm selling the stock every year for tax minimization purposes.

So is there anything about this strategy that seems to be a bad idea, or would seem questionable to CRA?
I am also exactly in the same boat as you. And this year I did start to take some capital gains, by selling the stock, then rebuying.

I am doing that as you describe to pay some tax now, instead of the large tax hit, when I pass away. Second reason I am doing it, is with the Federal Government liability’s, I think they will increase capital gains tax in the future.

I live frugally, as it is in my nature, so for me to want, or to spend all my funds before I pass will not happen.
[OP]
Deal Addict
User avatar
May 8, 2007
1095 posts
331 upvotes
Fraser Valley, BC
Thanks for those replies. BTW I'm about 70.

The idea to do something to deliberately pay more taxes in a given year is counter-intuitive. It's probably a bad idea for a younger person who should be trying to accumulate growing stocks and other assets, and trying to minimize taxes and delaying needing to pay them for many years. That's how I accumulated a lot of gains, most of my stocks have been held and growing tax-free for over 10 years, and I started investing long before that. But for an older person who has built up a portfolio it makes sense to take some capital gains early when it's clear that in the not-so-distant future their capital gains will be happening, one way or another, and if there is no portfolio downsizing the final year(s) of capital gains income will be high, as well as the corresponding tax rates.
Deal Expert
Jan 27, 2006
16505 posts
9300 upvotes
Vancouver, BC
porticoman2 wrote: old as in 70's, 80', 90's?

IMO don't sell then rebuy, because .....

ideally you draw down the holdings for minimum tax pain so that by the time to your life's expiry (10, 20, 30 years from now) the holdings/investments are zero.

plan as best you can.

ideally do this within the means that gives you a better quality of life while living or that doing this you could share the wealth today to loved ones while you are alive/they may need it.

money is of no value when you are dead when the taxman gets the benefit
While I agree in theory, the problem comes with the execution as no-one knows when the end will come with any great certainty - you can aim for the average life expectancy but what happens if you are one of the lucky ones and live another 10 or 15 years? Or how about you find out that you need to spend MORE money in those last years of your life (which is probably the case) than you budgeted for earlier on in your retirement?

Planning is all great but it really comes down to what actually happens and when you retire, once that capital has been spent, you'll have a hard time getting that back.
Deal Expert
Jan 27, 2006
16505 posts
9300 upvotes
Vancouver, BC
adams7 wrote: Thanks for those replies. BTW I'm about 70.

The idea to do something to deliberately pay more taxes in a given year is counter-intuitive. It's probably a bad idea for a younger person who should be trying to accumulate growing stocks and other assets, and trying to minimize taxes and delaying needing to pay them for many years. That's how I accumulated a lot of gains, most of my stocks have been held and growing tax-free for over 10 years, and I started investing long before that. But for an older person who has built up a portfolio it makes sense to take some capital gains early when it's clear that in the not-so-distant future their capital gains will be happening, one way or another, and if there is no portfolio downsizing the final year(s) of capital gains income will be high, as well as the corresponding tax rates.
If you think about it, over the life of the planning, you would be paying fewer taxes at the end of the day as you can keep your tax bracket down in the lower levels rather than getting hit later on. What you might want to do rather than buying the same company back is to take the opportunity to do some portfolio reconstruction and see if you can either upgrade some of those holdings or to more automate things so that the whole portfolio will take less maintenance as you get older.
Jr. Member
Jan 21, 2012
139 posts
113 upvotes
VANCOUVER
I won't address the issue of whether this is a bad idea but no, the CRA will not raise an issue with this.

This is not something most investors do for the obvious reasons (time value of money, benefit of compound growth and deferral of tax, etc.), but it is certainly done -- especially when someone knows that they will be moving up significantly in tax brackets.

It's also been done at many times where there have been concerns over a potential increase in the capital gains inclusion rate from 50% (to 75% or 100%) -- something accountants have often advised their clients to do (for better... or for worse).
Sr. Member
User avatar
May 31, 2018
684 posts
1592 upvotes
Saskatchewan
unodos wrote: It is called stock washing
SEC had laid out clear rules for it
You can not buy the same stock with in 30 days

https://www.schwab.com/resource-center/ ... wash-sales
Selling and rebuying to realize a capital gain is not “stock washing”.

Also, Canada doesn’t have the SEC, or stock washing. Those are USA things. We have the CRA and superficial losses.
Deal Addict
Mar 3, 2018
1985 posts
1990 upvotes
GTA
unodos wrote: It is called stock washing
SEC had laid out clear rules for it
You can not buy the same stock with in 30 days

https://www.schwab.com/resource-center/ ... wash-sales
Canada also disallows losses if stock is repurchased within 30 days before or after sale. Referred to as superficial losses. This doesn't apply to the OP though as he has capital gains not losses.
Deal Addict
Dec 28, 2007
1023 posts
555 upvotes
If you have TFSA room, you don't even need to sell any shares, just transfer them in-kind to the TFSA. Capital gains are still taxable, but losses can't be claimed.
Jr. Member
Jan 21, 2012
139 posts
113 upvotes
VANCOUVER
unodos wrote: It is called stock washing
SEC had laid out clear rules for it
You can not buy the same stock with in 30 days

https://www.schwab.com/resource-center/ ... wash-sales
Firstly, this information is for US, not Canadian taxpayers. Secondly, this is the opposite of the OP's situation (the OP is selling to trigger a gain, not a loss). Thirdly, it's the IRS not the SEC that's relevant in the above-noted link (not that it even matters given points 1 and 2).

My goodness.
Deal Fanatic
Jul 1, 2007
8477 posts
1557 upvotes
DaveTheDude wrote: Selling to create capital gains and then buying back immediately is acceptable. Where you have issues is when you sell to create a capital loss. That loss wouldn't be allowed if you had purchased the same shares within 30 days before or after your sale.
Every question you ever have about the Income Tax Act can be answered by simply asking yourself, "is it a benefit or a detriment to the CRA?" If a detriment, it's not allowed, if a benefit, it's a-okay.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Member
May 2, 2019
469 posts
531 upvotes
Vancouver
adams7 wrote: I am thinking I should sell some stock every year to get my taxable income increased to the 50K to 100K range.
Yes. Particularly, if you agree that the government will raise the capital gains inclusion rate almost for sure in order to deal with the recent deficit. 100K is maybe too much; the marginal tax rate jumps a little lower than that.

Good thread. It made me crunch some numbers. I'll skip the formulas and just give the results. The variables here are marginal tax rates, capital gains inclusion rate, and how much return on your investment you expect between now and the time the stocks would be sold anyway.

Even if deferring all taxes was better on average, there'd still be reasons to "reset" ACB on some stocks. They are useful for potential tax loss harvesting; or for avoiding a larger tax bill on emergency expenses; or if you decide to make a gift - it may be more useful earlier than later. (To somebody other than a charity. For charities, it is of course better to give stocks with the largest % of unrealized gains.)

It's the easiest decision in the lowest tax brackets. I'll do 30K/year first, even if it's not a realistic problem. I mean, even if you live on under 30K/year, you also need to draw some extra money to top up TFSA, that's a no brainer.

Example 1. 30-35K/year in "other income", nothing else. The marginal tax rate is 20% (BC). The capital gains inclusion rate 50%, and assume it stays in the future. For simplicity, assume the stock does not pay dividends and only returns capital gains, and it will be eventually sold at the marginal tax rate 50%.
Result: you need at least 200% return (that is, triple your investment) to make the tax deferral profitable. So unless you expect to be around for quite a while and not needing the money and doing well, it makes sense to prepay some tax.

Example 2. 35-80K/year in "other income", the marginal tax rate is 28% (BC), a more accurate 52% marginal tax rate for the future. The rest of assumptions the same. Note: it may appear the taxes are lower between 35-48K, but not really. There is GST/HST credit and other provincial bonuses that are paid until 35K fully. They are reduced gradually later, amounting for an extra 5% tax.
Result: you need at least 100% return (double your investment) to make tax deferral profitable.

Example 3. Same 35-80K/year as in Example 2, but now assume the capital gains inclusion rate will become 75% in the future.
Result: you need at least 300% return (quadruple your investment) to make tax deferral profitable. It makes a much better case for paying now.
Sr. Member
User avatar
Jan 23, 2011
565 posts
263 upvotes
adams7 wrote: Thanks for those replies. BTW I'm about 70.

The idea to do something to deliberately pay more taxes in a given year is counter-intuitive. It's probably a bad idea for a younger person who should be trying to accumulate growing stocks and other assets, and trying to minimize taxes and delaying needing to pay them for many years. That's how I accumulated a lot of gains, most of my stocks have been held and growing tax-free for over 10 years, and I started investing long before that. But for an older person who has built up a portfolio it makes sense to take some capital gains early when it's clear that in the not-so-distant future their capital gains will be happening, one way or another, and if there is no portfolio downsizing the final year(s) of capital gains income will be high, as well as the corresponding tax rates.
It's a strategy I always wanted to deploy near year end, but you have to admit, it is nice to see the columns of big gains when you check your portfolio. Doesn't it give you a sense of accomplishment? Once you sell and repurchase, it is gone... It might even flip to a loss position in the short term.
Member
Feb 8, 2015
485 posts
523 upvotes
Kanata
Thalo wrote: Every question you ever have about the Income Tax Act can be answered by simply asking yourself, "is it a benefit or a detriment to the CRA?" If a detriment, it's not allowed, if a benefit, it's a-okay.
It could be a detriment to CRA if you earned 0 income and claim S24,000 in capital gains...effectively paying 0 tax AND stepping up your cost basis

Gingercookie wrote: It's a strategy I always wanted to deploy near year end, but you have to admit, it is nice to see the columns of big gains when you check your portfolio. Doesn't it give you a sense of accomplishment? Once you sell and repurchase, it is gone... It might even flip to a loss position in the short term.
lol I doubt a 70 year old gives a flying crap about cool green numbers on his broker screen. OP probably just wants to lie in the sun, drink some wine and give his grandkids some chocolates everytime they visit him
[OP]
Deal Addict
User avatar
May 8, 2007
1095 posts
331 upvotes
Fraser Valley, BC
I sold some stock at a nice profit and a few minutes later rebought it, so this completes the first year of my "geezer cash-in the gains" strategy. I don't think this will cause any questions from CRA and the result is they will be getting a big payment from me in a few months, the biggest I ever made and in later years they will be even bigger.

Deadline for taking capital gains and losses this year is Dec 29.

BTW here is a CRA page listing many key income levels that effect personal taxes.:
https://www.canada.ca/en/revenue-agency ... ounts.html

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