Answering a Taxing Question

Want to know exactly how much your stock can drop before you’re better off selling rather than waiting for the long-term capital gains rate that kicks in after one year? Here’s the formula for factoring taxes into your sell decision:

ATP -- (LTCG)(TB)= BESP

.1-- (LTCG)

Let’s run through it using the hypothetical example of Gina Rocks.

She paid $28 per share for her stock. If she sells Monday, she’d cash out with about $384 per share. So her taxable gain would be $356 per share.

Multiply that by her ordinary income tax rate of 36% and you see she’d pay $128.16 in tax on each share. That would leave her with net, after-tax proceeds of $255.84 (the sales price minus the tax owed on the profit). You plug that number in where it says ATP in the formula above.

Now, from the $255.84, she’d subtract the product of the long-term capital gains rate (LTCG) times her tax basis in the stock (TB). That’s 20% (or 0.20) times $28, which works out to $5.60. The result: $250.24 ($255.84 minus $5.60).

Finally, she’d divide $250.24 by the inverse of the long-term capital gains rate, or 0.80, to get $312.80, the break-even sales price (BESP). As long as she sold her stock for more than that number, she’d be ahead by waiting for the lower capital gains rate.