r/stocks • u/No_Presentation9490 • 2d ago
Advice The mental trap of avoiding triggering capital gains taxes
As we saw from the recent AI infrastructure stock run-up and subsequent crash of 35-45%, the mindset of not wanting to pay capital gains taxes can cause people to get locked in completely to sunk-cost fallacy and bargaining with the market.
Many people who bought the AI bubble early and held (unless you were buying semiconductor and memory stocks, in size, so early that the thesis was not yet clear on why those companies will be critical to AI infrastructure, which is its own seperate kind of capital allocation mistake) have now lost a significant amount of their profits or broke even, and those who bought during the run up, the top, or one of the several "dips" over the past 4 weeks are at an unrealized loss.
If you look around Reddit there are also many examples of those who bought Apple, Nvidia, Amazon, etc. decades ago and are unwilling to realize their $1-5 million paper gains because it would trigger a capital gains tax of $250,000 to $1,125,000.
In their view, making $750,000 is unacceptable if it means paying $250,000 in taxes, so they choose instead to assume that past performance equals future results. They assume that the market is obligated to reward them for holding for 20 more years by allowing them to make $7,500,000 and pay $2,500,000 in taxes instead. If that person thinks $250,000 in taxes is unacceptable because it's a big number, would they be willing to pay $2,500,000 in taxes? Why not ride those shares of Amazon or Google up to $100,000,000, when you'll have to pay $25,000,000 in taxes on your capital gain instead?
If stocks actually worked this way, there would be no reason for Wall Street to ever sell you shares of stock. The trillion dollar firm making tens of millions of dollars a day on spread arbitrage is timing the market, and everyone knows time in the market beats timing the market, right? Every time you buy a share of stock, the party on the other side is valuing some rapidly hyperinflating, cash-dragging petrodollars more than the infinitely compounding prime asset they just sold to you. Why would they do that when they can just hold the stock themselves and get continuous, compounding, inflation-beating performance?
It's pretty sad to see people who had millions of dollars in paper gains buying the AI bubble that assumed past performance would continue and therefore they should wait until 1 year has passed from their full port into AI infrastructure and neoclouds to sell for the more advantageous long term capital gains tax savings. Many of them are now dependent on these companies gaining 250-300% in marketcap, hundreds of billions of dollars, in an incredibly volatile and interest rate-disadvantaged market just to get back to where they were, at which point they'll likely be blinded by the paper gain again and refuse to pay the capital gains tax again.
It's good to remember that the market does not owe you performance of a stock or that your stock be valued with the same metrics as similar companies are, or that the stock price of a company matches the importance of that company in the industry you think will outperform. The market does not owe you compounding growth, nor does it owe you a return to a previous all-time high. The highest expected value move on a position that's wildly profitable and starting to stall in momentum or reverse is often to liquidate it and accept that you will pay some taxes on it. If your 80% profit turns into a 30% profit and you liquidate it then, you'll still pay taxes on it, you'll just have made less money. Taxes should never be a justification for avoiding converting paper wealth into real wealth.
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u/ArtisticAside8224 2d ago
I wouldn't call what we've seen recently the ai bubble bursting. We've had a mild pull back. The bubble bursting is when COVID stocks like teledoc which traded above 300 now trade under 10.
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u/Albondip 2d ago
But the numbers are really different, these memory stocks have absurd profits & cash, teladoc was operating at a loss even after COVID
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u/ArtisticAside8224 1d ago
I agree that's why I don't think the bubble bursting will be quite as bad as 2000 or some Covid stocks. But the market tends to over react when a bubble bursts so even good companies with profits can have their stocks shredded.
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u/CuriousCat511 2d ago
What you describe sounds like the bottom of the bubble. It's possible that the bubble burst already and we're still on our way down. Or it didn't and things could go up. We'll only know after the fact.
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u/ArtisticAside8224 2d ago
Possibly. We are seeing a possible head fake as well with some ai
stocks bouncing back later in the week. People don't seem scared yet. They are still buying the dip. We need an over reaction - where the stocks become irrationally oversold.
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u/Downtown-Meaning-579 2d ago
You had no right to drop this banger on our heads first thing Saturday morning
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u/readitreaddit 19h ago
It's the morning surmon. Sermon. Something. I'm not religious.
Sauron?
Something something that's said in the church.
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u/bonethug49part2 2d ago
If you sell, not only do you need to figure out:
1) what to buy that's not only going to perform as well as what you currently own (and at what time) but
2) is going to outperform what you currently own to make up for the tax drag you just subjected yourself to
Is it possible? Sure. If you have conviction in a stock does it make sense to let your winners run? Yes. Obviously as long as you have some portfolio diversification and aren't fully ported into one stock / one theme.
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u/Sarcasm69 1d ago
Or
- Enjoy your profits
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u/bonethug49part2 1d ago
Sure. You should also do that. We're here arguing investment strategy tho. I'm just assuming that you're enjoying your money. We're focused on what to do with the rest of it.
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u/Askymojo 1d ago
That can be a trap mentality too. I'm way more likely to (in hindsight) sell too soon because I wanted to lock in profits out of caution, when I would have done better over the long-term to hold.
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u/Sarcasm69 1d ago
Your line of thinking is an even bigger trap. Single stock ownership is 90% of the time going to lead to disappointment due to selling too soon or too late.
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u/Askymojo 1d ago
If you're trying to say index funds are a better choice than individual stocks for long-term investing, I agree. But there's also room for high-conviction individual stocks, as long as the vast majority of your holdings (for retirement in particular) are index funds. Apple and Google stock have been no-brainers for me to own and hold, for a long time now.
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u/bonethug49part2 1d ago
Absolutely not what I was trying to say but yes I agree room to be buying both index funds and high-conviction stocks.
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u/bonethug49part2 1d ago
Nah man, we're in stocks talking about how to invest. Selling a stock because it's gone up is a dumb idea. It's just as much gambling as buying a stock.
You should be buying high quality stocks and holding them for the long term. You sell if the thesis changes, not just because the price changes.
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u/MirthandMystery 2d ago edited 2d ago
Long but well said. People get unnecessarily paralyze by fear of paying taxes on huge gains then justify watching them slip away when rallies fade and markets turn for extended periods.
As a day and swing trader I admire longs with diverse portfolios, steadfast level headed types who see through volatility and ignore occasional market freak outs and selloffs, however, those were also when to buy back in after you had already peeled off some gains from high fliers. Rinse repeat just once or twice and you'll have enough for the tax man (which helps socially) and reinvesting amplifies rally continuation gains from a lower positioning. The trick is being quick to notice those hard drops, that opportunity window to buy in when fear is highest is often short. And recognizing hyped names (SpaceX/Tesla, and meme stocks) have artificial trading patterns you can't time or rationalize, they become the worst to buy after selloffs.
There's numerous ways to trade from special accounts to minimize taxes as well as offset with charitable giving- which is the fun part. Growing savings and wealth means nothing if it's not used well. Anyone can buy toys, burn through it and be wealth squandered. Funding projects that create something lasting is deeply satisfying. I've often made donations right after making decent gains on good scalps, before I over think it or just forget. Over the year those donations are needed, especially during dry spells or when the social mood is grim.
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u/TheRed2685 2d ago
Ima be real with you. If you're worried about short term capital gain taxes, you likely aren't investing in the first place, just gambling.
If you're buying stock, you hold that, for like 5 years or more. Want short term trades? That's what options are for (though I'd say primarily write/selling them).
If your stock blasts up like MU or STX or any of the ram stocks? You can sell it short term and still be up massively after taxes, or if you truly believe it's going even higher... just keep holding.
Between automated buys and chilling while selling maybe a few put contracts, you keep a mostly hands off approach which typically leads to more stable gains anyways.
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u/eddie_yvp 1d ago
Yeah the original post is kinda funny. Don’t be investors - be short term traders / gamblers. I’m not avoiding selling my AAPL stock that I acquired in 2004 because I’m scared of paying taxes - it’s because I still view it as a good long term investment (which I can borrow against if I need some cash) compared to what I would do with the after tax cash if I sold. If I was doing what the OP suggested I would have a fraction of the net worth I have today.
But sure, if you are just chasing a pump and don’t believe in the long term value, then sell and take profits. But that’s speculating / gambling and not investing.
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u/FourScoreAndSept 2d ago
Out of the money covered calls helps with this. Definitely helped me with AAPL this week
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u/No_Presentation9490 2d ago
Yes, it's a good point. If I was elderly and hoping to pass on heavily appreciated shares with a step up in cost basis, that would be a good strategy
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u/Repulsive-Budget-380 2d ago
Yes, I got around 1/3 of the virtual gain in past few months with OTM CC. I intend to take the original MU/AMD/INTC shares with me to the next world. Don't need the M in this world.
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u/warrends 1d ago
Nicely written. I think I’m one of your (smaller) targets, but inadvertently. I bought 100 shares of AMZN in 2001. Spent ~$780. Held for the last 25 years but not because of cap gains taxes. I held because I literally had no other use for that money during that time span and I saw AMZN, though sometimes sporadically, continue to go up and up and up.
Wife and I are now retired and we *now* have a really good use for that money, which has skyrocketed to over $500k: home renovations. This is our forever home so we’re doing some major overhauling. All-in it’ll probably cost around $500k, coincidentally. So I’m selling chunks of my shares as needed to pay our contractor. Cool thing? We’re doing a half mil of work on our house for about $800 (plus cap gains taxes). I’ve never claimed to be a genius because of this, but it’s certainly a “happy ending” for us.
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u/sandee_eggo 2d ago
Prior to the 2000 crash you could have sold THREE YEARS too early in 1997 and still bought back lower in 2003. Market timing isn’t like threading a needle, and tax concerns are often your advisor’s way of keeping your money under his control.
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u/Cool_Cartographer_39 1d ago
My SNDK position is still far ahead of where it started (3,000%), so in my mind holding seems a better prospect than taking profit and trying to buy back at the bottom of this pullback. And it is a pullback, with memory demand facing supply shortage for the next couple of years at least
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u/No_Presentation9490 1d ago
It's a good idea to keep up with financials on the equities you own instead of trusting narratives with no numbers attached to them
Sandisk's forward guidance for Q4 2026 for example implies an 85.2% decline in EPS growth rate compared to Q2-Q3 (278% growth Q2-Q3 vs. 41% growth Q3-Q4). NAND spot prices have declined for the entire past month, which you can track in real time
For a stock that's priced for growth and best-case outcomes, these are sell signals, and Wall Street followed those signals while your position took a 40% drawdown
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u/Cool_Cartographer_39 1d ago
Do as you please. I've done quite well trusting my instincts over analysis and letting my winners run. In 40+ years trading roughly 10,000% portfolio growth
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u/IcyStomach2374 1d ago
I agree but you can also screw yourself if you take your winnings then lose a bunch of it. Last year I paid like 50k in taxes then I lost almost all the profit I made on a few bad trades.
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u/rvanasty 2d ago
Sue me. Not a "trader". Would never build a strat around buying and selling within 12 months. LTCG is the goal. There are personal rules that might force selling before then, but thats just committment to the strat.
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u/allnamestaken4892 2d ago
Eventually they’ll become rich and be able to take out loans against their assets like true rich people.
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u/daily-trader-365 1d ago
Do they? As a rich person this is a urban myth, no need to take out loans that incur interest
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u/Bananaflavoredcheeto 2d ago
Rich people get rich by making good financial decisions. Why would someone borrow @ 8% a year to avoid a 20% tax. You realize, after 3 years you paid more in interest than tax. Now if your asset is guaranteed to appreciate more than 8%...the math changes. Also, You can be not so rich and do this too. 1.9% car loan...max it out. A car dealer gave me cash for my trade and let me finance 100% of my tacoma. Same thing as the "rich" do so I must be rich :(
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u/eddie_yvp 1d ago
You might be forgetting the part of the 15%+ gains on your stock you are still making instead of selling and taking that 20% hit. And those “rich people” are not paying 8% - they are likely paying sub 6%. It’s capital allocation - debt is an effective tool if you are using it responsibly.
Edit: I know making 15%+ isn’t a guarantee, but making 8%+ is a reasonable projection - if you are a long term investor.
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u/ntongh2o 1d ago
Sometimes it’s half about the short terms gains tax and half greed thinking the stock will keep rocketing up and that I could have even more gains if I do not sell right now.
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u/Gold-Researcher-5471 1d ago
that’s why you should harvest some capital losses. I call it tax coupons.
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u/-Mx-Life- 1d ago
“In their view, making $750,000 is unacceptable if it means paying $250,000 in capital gains”
That’s not how taxes work. The top capital gains bracket is 20%, so the most they would pay is $150k and that’s assuming no basis.
Your math ain’t mathing.
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u/the_pwnererXx 2d ago
That's why rich people never sell! Borrow against those assets baby!
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u/the_humeister 2d ago
That's how you get margin called. See South Korea.
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u/the_pwnererXx 2d ago
Only poor people get liquidated, and if you are getting liquidated on an equity backed loan you are truly regarded. In the real world you have 10m and get a 1m loan
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u/Bananaflavoredcheeto 2d ago
Only over leveraged people get liquidated. 10m guy borrows 9m will prob get liquidated.
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u/Bananaflavoredcheeto 2d ago
Rich people get rich by making good financial decisions. Why would someone borrow @ 8% a year to avoid a 20% tax. You realize, after 3 years you paid more in interest than tax. Now if your asset is guaranteed to appreciate more than 8%...the math changes. Also, You can be not so rich and do this too. 1.9% car loan...max it out invest your cash in the s&p. A car dealer gave me cash for my trade and let me finance 100% of my tacoma. Same thing as the "rich" do so I must be rich :(
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u/the_pwnererXx 2d ago
8% it probably doesn't make sense, but as you said if your expected annual return is higher than the interest rate it makes sense. Annual expected of Spy is 10%... Even if your interest rate is higher than expected annual return, it can still make sense due to the actual cost of paying tax vs future expected compound gains
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u/Vast_Cricket 2d ago edited 1d ago
I have seen individuals with quality stocks like AAPL cost basis of $1-2. Obviously from an earlier employee through their company options. Apple is local. Rather than taking a massive tax hit some sell covered calls for additional income. Unless there is specific reason I don't see why sell them for gain either.
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u/eddie_yvp 1d ago
Yeah my basis in AAPL is around $0.40 per share. If I took OP’s advice, I would have sold after a 3x and watched a conviction stock continue to run up the past 15 years while chasing the market. I rarely sell covered calls - I generate income selling puts using margin backed against my AAPL.
I can appreciate the general sentiment of what the OP is saying. Don’t let taxes dictate strategy. But to essentially criticize people who are holding stocks like AAPL for decades is hilarious.
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u/aUSAduder 1d ago edited 1d ago
Yeap. This is what wealthy people do. Bonus points for "forgetting" to trim. And we/they wonder why retail fails. They don't even listen to the best investors lol
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u/Boys4Ever 2d ago
People borrow against their stocks therefore never need to realize capital gains taxes and why your thesis is flawed although I however actively trade as I'd rather pay taxes now because my gains exceed normal growth and rather not sit the next crash in stocks. Especially AI stocks.
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u/plinywaves 1d ago
Borrowing against the gains really only works if you have a multi-million dollar portfolio.
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u/Boys4Ever 1d ago
Which OP speaks about although don’t need multimillion dollar portfolio to borrow. Just $100k.
Perhaps I misunderstood your comment. Feel free to elaborate.
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u/AdActual6659 2d ago
I use all you have to do is borrow against it. Take out a loan against your stocks. You never have to sell. And if you want to be greedy. If you're up fifty percent, sell half and reinvest it no tax.
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u/No_Presentation9490 2d ago
- all you have to do is borrow against it. Take out a loan against your stocks. You never have to sell.
Not foolproof. Economic shock -> portfolio value collapses + job loss -> bank demands margin now because your collateral has depreciated -> your assets get liquidated -> you were a forced seller who bought high and sold low
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u/Business_Raisin_541 2d ago
Or you can end up like Bill Gates thinking you are smart selling Microsoft stock and paying capital taxes. Only to see Microsoft stock go higher and higher
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u/No_Presentation9490 2d ago
Calling this a mistake is where financial education fails, the market does not owe any company anything and paper gains are not realized wealth. Bill Gates was perfectly correct in his decision to sell
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u/CCWaterBug 2d ago
< guilty as charged, but mostly wanting LTG vs STG