What to do When Your Stocks Have Highly Appreciated

Written by: Lee Sherman

With Joe Biden in the White House, the tax burden on the super-rich in the US is expected to grow substantially in the near future. Both the long-term capital gains tax (which now tops out at 20%) and short-term capital gains are expected to be nearly double what they were in prior administrations, since both will be taxed as ordinary income in the highest bracket. This is a big change from a time when nearly all taxpayers paid just 15% and even those in the highest income bracket paid 23.8 % and is a key component of Biden’s $1.8 trillion American Families Plan.

The taxation plan proposed by Biden is as dramatic as the budget, infrastructure, and other programs he is pushing through Congress. Not since FDR have we seen this much spending. But Biden has also promised to find a way to fund them.

Biden says he is going to eliminate the “loopholes” that allow people making more than $1 million dollars a year to pay a lower rate on their capital gains than those making less. So what does this mean for long-term investors with highly appreciated stocks? Your financial advisor can help you determine which strategies are available to help you lower your overall taxes and, most importantly minimize your capital gains. They can also tell you whether this is a good time to sell off your investments, donate them, or hold on to them. While it is indeed true that the Biden administration is more focused on closing the “loopholes” than were previous ones, there are still some things you can do.

Should you give it away?

You may also want to consider Donor Advised Funds (DAFs), a relatively new investment vehicle that lets you use your money to help charitable causes grow their wealth rather than simply throwing your money into a black hole. Your financial advisor can help you set up a charitable savings account that lets you contribute cash, stock or even physical assets like real estate or collectibles.

You’ll get an immediate  income tax deduction in the year you contribute to it at up to 60% of adjusted gross income, up to 30% for any securities and other appreciated assets, and a five-year carry-forward for unused deductions. Gifts of appreciated assets like securities, real-estate, or other liquid assets won’t be charged capital gains tax. Your DAF will not be subject to estate tax. And your investments in a DAF can appreciate tax-free. These accounts are managed by a nonprofit that invests the assets and manages the donor’s account. In this way, it is more of an active investment that is ongoing and you can have some assurance that your money can become working capital for the charity (while avoiding the scandals that can come from investing in charities).

Don’t panic

While these changes to the tax rates are concerning for high-net worth individuals, experts agree that scrambling to sell off-your assets is never a good idea. Rather than let your emotions get the better of you, you should come up with a long-term strategy that starts with a well-balanced portfolio. Selling off your assets slowly over time allows you to keep your long-term capital gains below the $1 million dollar threshold, while tax-loss-harvesting allows you to carry losses forward to other years, offsetting them with any gains, and investing in a 401(k) can let your portfolio grow tax-deferred and avoid capital gains entirely.

Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.

Related: The Dangers for Investors Being “All-In”