Quantifying the risk of holding securities for a long-term capital gain tax treatment

With the recent run up in the stock market many are wondering whether to hold their positions for the required year to be taxed at the long-term capital gain rate of 15% or to cash out now and pay tax at the higher ordinary income tax rates.  In order to make an educated decision it is necessary to compute the break even price or the price below which the net proceeds after capital gains tax would be less than the net proceeds after paying ordinary income taxes.  The following formula has been devised to compute the break even price:  

BE = CP - (CP-TB) Rate - .15TB




BE = break even price

CP = current price

TB = tax basis

Rate = current federal tax rate


For example:


Assume, Stock purchased in March for $10 is now selling for $30 and you’re in a 35% federal tax rate.


BE = 30 – (30 – 10) .35 - .15(10)



BE = 25.29 


You would benefit by waiting the year for long-term capital gains rate as long as the stock did not drop below $25.29 per share.  In the event that Obama raises the long-term capital gains tax rate to 20% the formula would be as follows:


BE = CP – (CP – TP) Rate - .2TB



In this case the break even price would be $26.25. 

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