Question about capital gains

Jay Framson · 08-25-2005, 10:04 PM

OK, here's a question from a beginning investor to all you seasoned investors out there. First off, I admit I haven't read any of Cramer's books - yet. And this is not a problem I need to worry about yet. But, ultimately someday (hopefully) it will be, and I want to know what to do when/if I get to that point.

OK, I've heard Cramer say and write some different things about when to sell and whether to worry about paying short term capital gains on a stock that he says it's time to sell. On the one hand he says he's giving recommendations for trades on a six-month to one-year horizon, he writes on his 25 investment rules that if it's time to sell a stock you shouldn't be afraid to do so and pay the taxes; on the other hand I read in one of his articles that you should be sure if you're selling a stock that you've held it for a year.

So my question is, for active trading (as opposed to long term investing), is Cramer recommending that you just not worry about short term capital gains, because your profits should offset them if you're doing things right? When he says "sell sell sell," is that categorical, regardless of whether you perhaps have owned a stock for 11 months and maybe want to wait it out a little more for tax purposes?

Just trying to figure out what the overall strategy is. I realize he sometimes makes recommendations on buying a stock for investment vs. trading purposes, but mostly his focus is on trading.

Thanks for any guidance.

cnelson · 08-25-2005, 10:29 PM

You've essentially figured it out.

For stocks that someone holds for over a year, the tax you must pay for the profits you see from selling that stock are significantly less (i.e. stocks sold after a year are considered a long term capital gain; anything prior to that is a short term capital gain).

For quick investments (trades) Cramer is advocating just what you are saying. For instance, lets say you invest in a stock and 6 months down the road it is up 10 or 20% (say something along the housing or energy sectors, which have been hot recently).

Well, if you sell in the short term, even though you'll be taxed more heavily on those gains, at least you KNOW there will be a gain to be had. If you automatically choose to wait one year before selling a stock, the gains you've realized may no longer be there (i.e. a year from now who knows if a housing bubble would have burst, or oil is back to $40 a barrel).

Bottom line: selling stocks before one year causes you to be taxed more, but if you aren't confident the gains will still be there in a year, bite the bullet and pay the tax.

One last point - Ric Edelman has a great book about money. Its not really a book about investing, but sort of a broad overview of all things financial. Its called, "The Truth About Money." Its a good read, and may even be worth tacking before reading Cramer's "Sane investing..." book, which I also found helpful.

Jay Framson · 08-26-2005, 01:51 AM

I'll be sure to check out that book ... Thanks for the tip!

optimus25 · 08-29-2005, 12:41 PM

Jay,

Short term capital gains depend on your tax bracket. Most of your portfolio should be in long term holdings anyways.

For your speculation/trading portfolio you shouldn't worry about the taxes...it might affect your judgement on the best time to sell a stock. Normally the best time to sell a stock is when you've made money.

"Pigs get slaughtered"

Jay Framson · 08-29-2005, 08:24 PM

Thanks. Right now I am using "Mad Money" in the amount of around $6,000 that was in a savings account, and is excess of what I figure I need for an emergency fund. I know I need to read a book about investing pretty soon, in the meantime I've been reading material from various sources and watching Cramer. I have the portfolio split among 5 stocks which probably is too many for that amount, but I'm learning as I go. I figure I won't really learn and absorb this stuff until I'm actually doing it, and if I make a ton of mistakes at first that's OK.

I do have a portfolio in my rollover IRA for long term investments; that portfolio consists entirely of mutual funds.

08-25-2005, 10:04 PM	#1
Jay Framson new member Join Date: Aug 2005 Location: San Francisco Bay Area Posts: 15	Question about capital gains OK, here's a question from a beginning investor to all you seasoned investors out there. First off, I admit I haven't read any of Cramer's books - yet. And this is not a problem I need to worry about yet. But, ultimately someday (hopefully) it will be, and I want to know what to do when/if I get to that point. OK, I've heard Cramer say and write some different things about when to sell and whether to worry about paying short term capital gains on a stock that he says it's time to sell. On the one hand he says he's giving recommendations for trades on a six-month to one-year horizon, he writes on his 25 investment rules that if it's time to sell a stock you shouldn't be afraid to do so and pay the taxes; on the other hand I read in one of his articles that you should be sure if you're selling a stock that you've held it for a year. So my question is, for active trading (as opposed to long term investing), is Cramer recommending that you just not worry about short term capital gains, because your profits should offset them if you're doing things right? When he says "sell sell sell," is that categorical, regardless of whether you perhaps have owned a stock for 11 months and maybe want to wait it out a little more for tax purposes? Just trying to figure out what the overall strategy is. I realize he sometimes makes recommendations on buying a stock for investment vs. trading purposes, but mostly his focus is on trading. Thanks for any guidance.

08-29-2005, 12:41 PM	#4
optimus25 forum leader Join Date: Aug 2005 Location: Orange County, CA Posts: 1,801	Jay, Short term capital gains depend on your tax bracket. Most of your portfolio should be in long term holdings anyways. For your speculation/trading portfolio you shouldn't worry about the taxes...it might affect your judgement on the best time to sell a stock. Normally the best time to sell a stock is when you've made money. "Pigs get slaughtered" __________________ "Face your deficiencies and acknowledge them. But do not let them master you." Helen Keller "The man who can drive himself further once the effort gets painful is the man who will win." Roger Bannister My online trading Journal: http://stockmarketaddict.blogspot.com

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08-25-2005, 10:29 PM	#2
cnelson valued contributor Join Date: Aug 2005 Posts: 164	You've essentially figured it out. For stocks that someone holds for over a year, the tax you must pay for the profits you see from selling that stock are significantly less (i.e. stocks sold after a year are considered a long term capital gain; anything prior to that is a short term capital gain). For quick investments (trades) Cramer is advocating just what you are saying. For instance, lets say you invest in a stock and 6 months down the road it is up 10 or 20% (say something along the housing or energy sectors, which have been hot recently). Well, if you sell in the short term, even though you'll be taxed more heavily on those gains, at least you KNOW there will be a gain to be had. If you automatically choose to wait one year before selling a stock, the gains you've realized may no longer be there (i.e. a year from now who knows if a housing bubble would have burst, or oil is back to $40 a barrel). Bottom line: selling stocks before one year causes you to be taxed more, but if you aren't confident the gains will still be there in a year, bite the bullet and pay the tax. One last point - Ric Edelman has a great book about money. Its not really a book about investing, but sort of a broad overview of all things financial. Its called, "The Truth About Money." Its a good read, and may even be worth tacking before reading Cramer's "Sane investing..." book, which I also found helpful.

08-26-2005, 01:51 AM	#3
Jay Framson new member Join Date: Aug 2005 Location: San Francisco Bay Area Posts: 15	I'll be sure to check out that book ... Thanks for the tip!

08-29-2005, 08:24 PM	#5
Jay Framson new member Join Date: Aug 2005 Location: San Francisco Bay Area Posts: 15	Thanks. Right now I am using "Mad Money" in the amount of around $6,000 that was in a savings account, and is excess of what I figure I need for an emergency fund. I know I need to read a book about investing pretty soon, in the meantime I've been reading material from various sources and watching Cramer. I have the portfolio split among 5 stocks which probably is too many for that amount, but I'm learning as I go. I figure I won't really learn and absorb this stuff until I'm actually doing it, and if I make a ton of mistakes at first that's OK. I do have a portfolio in my rollover IRA for long term investments; that portfolio consists entirely of mutual funds.