Many investors believe they need to make investment decisions with their tax situation in mind, and they’re often right — but not always.
There’s a phrase that goes, “Don’t let the tax tail wag the dog.” That means you should not try to optimize your investment decisions too much for taxes. My philosophy is quite simple and has done me well over the years: Invest money for growth wisely and let the taxes fall where they may.
Some tax-based stock decisions make perfect sense. For example, if you have held a stock in a taxable account for 361 days and you are thinking of selling it, I would strongly be in favor of waiting five more days to establish long-term capital gains treatment.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If a stock is held for 365 days or longer, then you pay a lower federal capital gains tax rate. The tax for long-term gains is 20% for those in the higher income tax brackets. For short-term capital gains (on investments held less than 365 days), you will pay ordinary income tax rates — which for high earners can be as high as 39.6%. Trying to hold for long-term capital gains is certainly worth it, and would help reduce the tax bracket to 20% from what could be over 39%. This is good tax planning.
However, if you need to sell a stock to protect principal, the tax issue should really be irrelevant. Also, whenever we buy a stock, we hope we can keep it for three, five or 10 years or longer — which, of course, would be great from a tax perspective. If you do hold for 10 years, there are no taxes at all (on the gains) over this time period. Of course, once you sell the stock, taxes will be due.
I’m a staunch advocate of investing in growth stocks, which have a lifecycle. Once you have determined that the growth phase is over and the stock has principal risk, then you must act to protect principal, and the only way to do that is to sell.
Yes, you will have to pay a tax, and hopefully by that point it’ll be a long-term capital gains tax. However, this tax cost is simply an overall cost of growing your funds over time. I do not believe you should sell a gain in your portfolio every time you sell a loss. Some investors try to offset all gains with losses to avoid taxes, but doing so may mean you are selling a stock far too prematurely.
Finding great investments is hard work, and keeping them through their ups and downs is a worthy, but difficult goal. Don’t let the potential tax consequences lead you astray when it comes to making investment decisions.
Rob Lutts is president and chief investment officer of Cabot Wealth Management and the author of The Great Game of Business: Investing to Win.
-
What’s the New 2026 Estate Tax Exemption Amount?Estate Tax The IRS just increased the exemption as we enter into a promising tax year for estates and inheritances.
-
The Economy on a Knife's EdgeThe Letter GDP is growing, but employers have all but stopped hiring as they watch how the trade war plays out.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation TargetYes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable GivingTaxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
A 'Fast, Fair and Friendly' Fail: Farmers Irks Customers With Its Handling of a Data BreachFarmers Insurance is facing negative attention and lawsuits because of a three-month delay in notifying 1.1 million policyholders about a data breach. Here's what you can do if you're affected.
-
Serving the HNW Market: How Financial Advisers Can Break Through and Deliver Lasting ValueFinancial advisers have a significant opportunity to serve high-net-worth clients by elevating their capabilities, delivering comprehensive planning, building diverse teams and prioritizing family wealth education.
-
Don't Just Sell, Connect: How Financial Advisers Can Ignite Their Sales GrowthAvoid complacency and embrace small, consistent improvements to optimize your sales process and results.
-
Are You a Small Business Owner Buckling Under Economic Pressure? Here's How You Can CopeSignificant emotional and financial challenges, including tariff worries, are piling up on small business leaders. Here's how leaders can develop more healthy coping strategies and systems of support.
