Growing my taxable investment portfolio is all relatively new to me. I’ve been seeking to grow my non-retirement accounts from $0 up to $100,000 in four years. I’ve done pretty well and am just about there. As a matter of fact for a day or two ago my accounts topped $100k and then receded.

All of my prior trading and investing on my own has been in retirement accounts. in self-directed IRA’s.

Buying and selling stocks and crypto in my taxable accounts has not come without some angst. It pains me to think that when I sell an investment at a profit, I am going to have to pay tax!

Here in the U.S., we have two things to consider:

• We pay short term capital gains tax if we buy and sell an investment within 1 year (less than 1 year).
• We pay long term capital gains tax if we buy and sell an investment that is held for more than 1 year (greater than 1 year).

Short term capital gains

The short term capital gains are taxed as ordinary income, for any investment that you buy and sell inside of one year….at whatever your income tax rate is. The income tax rate is generally going be higher for most people.

Below is a table that shows the rates as of 2020, which are based on your income level:

For me, I fall into that 24% tax rate for any short term capital gains.

For example, if I sell a stock that I held for less than 1 year… where I invested $10,000 in and ended up selling for $30,000, I have a $20,000 short term gain ($30,000-$10,000=$20,000).

That $20,000 is taxed as ordinary income, just like your salary. So if someone makes $100,000 at their job, this $20,000 is taxed at that same rate, using that table above.

In this example, you have to hand over to the government 24% of that hard-earned $20,000…which is $4,800. Mentally… that just hurts!

Long-term capital gains

Using the same example, as before…if I held an investment that I bought for $10,000 and sold for $30,000 and the holding period was greater than one year, I would pay long-term capital gains tax on that $20,000. Long term capital gains is taxed at a different (and lower) tax rate.

Here is the long-term capital gains table as of 2020:

So for me, I fall in the 15% long-term capital gains tax rate.

Using the same example of a $20,000 gain, the tax I would have to pay for an investment that I held for more than one year is going to be $3,000.

That’s a $1,800 difference!

On a percentage basis, the difference IS NOT 9% (24% – 15%)… it’s actually a difference of 37.5%.

You have to look at the percentage difference between the percentages. Look at the difference between 15 and 24. Or, look at the percentage difference between $3,000 and $4,800. Calculate it out yourself…

It’s 37.5% more tax if you sell inside of of one year.

Pure agony, right?!

I’ve felt first-hand the feelings that taxes can play on whether to sell a holding or not. The back and forth between whether it is worth it to hand onto a stock for more than one year or sell less than one year is a real dilemma.

Over time, I have come to several realizations related to short-term vs. long-term capital gains…

Don’t let the tail wag the dog

I’ll give you an example.

When I first started up by switching my $240 bi-weekly investment into a new Robin Hood account, I was investing in a rapidly growing medical products company called Zynex (ZYXI). I had been buying it on a consistent basis from around $8/share and continued to do so as it climbed up into the $25 range. It was a wonderful feeling to watch the stock climbing methodically higher and higher.

But at a certain point, starting around May of 2020, it started to falter. The rally stopped and it looked like it had peaked. Looking at the fundamentals, there might also have been justification. They sell medical products by visiting doctors offices with a veritable army of recently hired medical devices salespeople.

Then Covid hit.

Doctor offices were closed. The sales were at risk of stalling out and yes, it turns out that their sales were impacted, including delays in the amount of devices being manufactured. In addition, there were questions surrounding their entire business model, whether insurance would pay for their devices.

I thought the stock was due for a correction. There were some serious headwinds that were not there when I first made my decision to buy the stock.

I was at a crossroads…should I hang on or sell?

• I didn’t want to lose almost all of my gains. I had essentially doubled what I put into it. I knew the stock was going to face a decline that would last for a decent amount of time.
• I also didn’t want to pay short-term capital gains taxes, preferring to hold until I at least got past the one-year mark. Remember, the short term gain tax rate is way higher than long-term capital gains rate.

In the end, I decided that I needed to sell. The loss I thought I would incur on paper if I held would be greater than the different in the amount between short term capital gains vs long-term capital gains. I didn’t want to have my portfolio stagnate for over a year while I waited for a recovery. I needed to continue to put my money to work.

Here is a stock chart where I marked the exact point where I sold, along with what happened afterwards.

Look at that decline…all the way down to the $13! It has since recovered a bit, currently at $18.71 as of this morning.

So, while I am certainly going to pay more in taxes because I held ZYXI for less than one year, I also would have lost (on paper), a good portion of my gains I had achieved.

Here is what happened afterwards:

• My ZYXI proceeds were $3,273.30
• By the end of 2020 my Robin Hood account stood at over $13,000!

Think about it… I was concerned about paying the DIFFERENCE between the short-term and long-term capital gains rate!

This turned out to be $156.

In hindsight, I would have saved $156 in tax savings and sacrificed about $7,000 in gains!

Holding onto ZYXI would have clearly been a case of the tail is wagging the dog. Making a relatively minor decision like taxes influence whether you should sell your investment could prove to be a major mistake!

Bottom line…don’t let taxes drive your decision-making!

At the time I made the decision to sell, I did not know about the major gains I was going to make. Those gains are purely hindsight now.

I had to trust that it was the right decision and I needed to continue to put my money to work. At the time, Bitcoin seemed like a great next step for that account (I probably sense another blog post coming with my thoughts about Bitcoin at the time).

Think about whether you should sell based because the situation with your holding has changed for the worse compared to when you bought. If you know for sure that you should probably get out and move on…get out and move on!

Don’t look back and regret hanging on because of taxes!