Taxes And Your Company Stock

When presented with a concentrated stock position, one of the selling considerations is around balancing cost (any taxes to be paid upon the sale of stock) and speed (how quickly to unwind a concentrated position.)

The IPO and private markets of 2019 have shown us that ongoing increases in the price of any single security is not inevitable. Another reminder that the more important drivers of stock sales should be around information at hand and personal circumstances.

One piece of information at hand is long-term capital gain tax rates, which differ based on taxable income.

Let's explore further.

John and Mary will have a combined $385k of taxable income in 2019. Additionally, John has ~ $1m in his company stock, which makes up over 80% of their overall net worth. Much of this stock has been held for more than a year and has very low cost basis.

John is on a fast track to a leadership position within the company, with likely promotions and pay raises beginning next year. Fortunately, their taxable income projects up and to the right.

Typically, you want to be careful making stock sale decisions at the end of the year. All else being equal, by simply waiting until January 2020 to sell stock, the tax bill is deferred until April 2021.

But in this particular case, there's an opportunity. At $385k of taxable income, John and Mary can look to intentionally create MORE taxable income this year by selling stock to take advantage of the 18.8% capital gain tax rate. Because of the likelihood that their taxable income will increase next year, it is likely that any 2020 stock sales will incur the 23.8% long-term capital gain tax rate. Selling stock now would also alleviate some of the concentration risk of their portfolio, provide liquidity to pay down debt, invest elsewhere and save more for their children's college. The tax opportunity aligns with the overall vision.

If John were to sell $200k worth of stock (which has a cost basis of $100k) he will create an additional $100k of taxable income. This would bring them around $485k of taxable income, all but assuring that the 18.8% rate will be taken advantage of. Apples to apples, waiting until 2020 to sell the stock will actually cost them $5k.

2019: Additional $100k taxable income @ 18.8% = $18,800

2020: Additional $100k taxable income @ 23.8% = $23,800 

This is an oversimplification of a more complex conversation. But an awareness of the tax code can be a significant factor into how one plans around large positions of their own company stock.

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^{Source: Navigating the Capital Gain Bump Zone (kitces.com)}

^{The hypotheical example above is for illustrative purposes only.}

^{The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Voya. Comments concerning the past performance of [e.g. monetary instruments, investment indexes or international markets] are not intended to be forward looking and should not be viewed as an indication of future results.}

^{Neither Voya Financial Advisors nor its representatives offer tax or legal advice.  Please consult with your tax and legal advisors regarding your individual situation.}