Capital Gains Tax Spike: A Quick Way To Lose 13% ... Wait Until The Ball Drops In 2012

by: Abe Garver

Long-term Capital Gains Rate to Skyrocket 66.7%

Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy.

After the ball drops on December 31, 2012, the federal long-term capital gains rate will literally skyrocket 66.7% in one second from 15% to 25% (21.2% plus 3.8% Medicare tax from Obama's health plan).

In other words if you have owned stock in a public or private held company for at least a year and you don't sell it before January 1, 2013, the gain will immediately be worth 13.3% less after-tax.

Liquidity Consideration for Private Company Shares

While the shares of stock in publicly traded companies like Wal-Mart (NYSE:WMT) and Netflix (NASDAQ:NFLX) can be converted to cash quickly, it may take between six (6) and twelve (12) months to sell a privately held business. If you are considering selling shares in a private company before the December 31, 2012 deadline, I would recommend contacting an investment banker and tax advisors as soon as possible.

Dividend paying Stocks

If you own a dividend paying stock, that income would be taxed as ordinary income with a top rate of 39.6 percent, instead of 15 percent now.


I bought my first shares of Apple stock (NASDAQ:AAPL) in middle school. The company had gone public on December 12, 1980 at $22.00 per share. Since then shares have split three times, so on a split-adjusted basis the IPO share price was $2.75.

Let's assume I have 1,000 shares at $2.75 so my cost basis is $2,750 dollars.

If I sell them for $385 dollars a share before December 31, 2012, I gross $385,000 dollars on a pre-tax basis. If I sell them for $385 a share after December 31, 2012, I also gross $385,000 dollars on a pre-tax basis.

In both examples I have a gain of $382,250. Assuming a 15% long-term capital gains tax rate my after-tax profit would be $324,912. Assuming a 25% long-term capital gains tax rate the after-tax profit would be $286,687.

This means if I wait until after the ball drops in 2012 to sell, I'll lose $38,225 dollars, which happens to be about the same amount it would take to buy 300 bottles of Dom Pérignon on Amazon (NASDAQ:AMZN) and ship them to Uncle Sam via FedEx (NYSE:FDX).

What is the best time to sell?

Many private business owners who are planning to sell their company over the next several years may accelerate their plans in order to maximize the after-tax cash payout at closing. This may result in an unusually large number of private businesses offered for sale during 2012.

Similarly the increase in long-term capital gains rates may trigger large amounts of tax related selling in public companies which would likely depress prices.

Legislative Background

The Bush tax cuts refers to changes to the United States tax code passed during the presidency of George W. Bush that generally lowered tax rates and revised the code specifying taxation in the United States. These were the:

  1. Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
  2. Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

While each act has its own legislative history and effect on the tax code, the JGTRRA amplified and accelerated aspects of the EGTRRA.

Moreover, since 2003 the two acts have often been spoken of together, especially in terms of analyzing their effect on the U.S. economy and population and in discussing their political ramifications.

The Bush tax cuts had sunset provisions that made them expire at the end of 2010, since otherwise they would fall under the Byrd Rule.

Whether to renew the lowered rates and how became the subject of extended political debate, which was resolved during the presidency of Barack Obama by a two-year extension that was part of a larger tax and economic package, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.