• Andrew Fox

Closing out investment positions prior to year-end?

Updated: Apr 22

As we reach the end of another calendar year, and accordingly another tax year, many investors face the decision of whether to crystallize capital gains in the current year or to defer to the next year. Often times, I find that investors will commonly defer triggering gains to a later calendar year to avoid paying the tax now despite holding an investment that is no longer suitable for them. The conversation usually goes something like this:

Advisor: “Investment X has done well for you but is no longer a good fit so I would recommend selling to lock in your gains and switching to investment Y.”

Investor: “I agree that investment X no longer makes sense, however, if I sell I’ll be stuck paying tax on the capital gain in the next few months but if I hold onto the security until January I’ll be able to push that for another year.”


Advisor: “(Insert rant here on making investment decisions for tax reasons)”

Based on this conversation it appears there are two options, so let’s explore those and assume:

  • The investor’s position is worth $100,000 of which $60,000 is a capital gain

  • The investor has utilized an investment vehicle that allows them to separate the growth from the cost base (what the investor initially put in) when selling

  • The investor is planning on re-allocating the after-tax proceeds of investment X to investment Y if they do sell

  • The investor’s tax rate is 50%

  • The investor is planning on donating $20,000 of cash on hand to charity in 2019

The first two options that come to mind for the investor are:


1. Make the correct investment decision, bite the tax bullet and invest the after-tax proceeds into investment Y:

  • Tax paid (net of tax credits): $5,000

  • New position in investment Y: $95,000

  • Total charitable donation of $20,000

Pros: Appropriate investment

Cons: $5,000 of tax


2. Continue to hold the investment in hopes the market doesn’t correct over the next few months and defer the tax hit for another year:

  • Result: Unknown

Pros: No tax

Cons: Inappropriate investment


But what if there was a third option:


3. Make the correct investment decision but instead of donating cash, donate $20,000 of the capital gain and invest the cash in Investment Y along with the net of tax proceeds:

  • Tax paid (net of tax credits): $0

  • New position in investment Y: $100,000

  • Total charitable donation: $20,000

Pros: Appropriate investment, $0 tax


You’ll note that by simply re-jigging their donation the client was able to switch investments on a tax-free basis and thereby negating the cons in options 1 and 2. Just some food for thought as you head into the end of the year.

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