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Converting company stock to low cost mutual fund

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  • Converting company stock to low cost mutual fund

    Question for the group.
    My wife works for a large company and she is given the opportunity to use a portion of her salary to purchase company stock at a discount. The stock purchases go into a fidelity account which I believe she can then do as she wants with. She has been doing this for a couple years now and now she has a chunk of money sitting in that fidelity account that is all in one company's stock. She gets a portion of her salary deferred into the fidelity account and I believe every once in a while a stock purchase is made. If I am reading the financials correctly she has used about $75,000 of her own money to purchase the stock and the stock has gradually increased over the years and her total $ value is now almost $150,000. Now that we discovered WCI and are more knowledgeable about our investments we want to convert this single company stock to a low cost total market index fund. If I understand correctly if we sell the entire $150,000 now we would have to pay taxes on about $75,000 is that correct?

    My main questions are below
    1. what portion of the $75,000 in gains would be long term vs short term capital gains? is there a way to easily find out?
    2. If we only want to sell the portion that counts towards long term capital gains how do I find out what dollar amount we should sell and convert to a total stock market fund?
    3. Is there a general rule of thumb or safe way that we can just once a year sell a portion of the stock and know we are only selling that portion at long term capital gains rates?
    4. For simplicity sake should We just sell all the shares now and convert and pay what ever capital gains tax is thrown at us?
    5. Going forward if we are allowed to, should we just sell the stock immediately after it is purchase so we know the gains will be minimal and we can just convert it to the total stock market fund immediately?

    Thanks for the advise in advance

  • #2
    1.) Long term gains are the stocks you've held for longer than a year. Short term gains are the stocks you've held for less than a year.

    2.) Make sure your cost basis is for specific identification. This will show you the lots when you bought them and if they're short term or long term gains. I don't have Fidelity for a taxable account but I have them for my 401k and when I click on a fund it looks like the cost basis is already 'spec ID'. It shows me when I bought the particular lots and if they're short term or long term gains (or losses). When you go to sell or exchange in Fidelity, under Dollar Amount, click the 'Specify Shares' box.

    3.) You just sell only the particular lots that you want to.

    4.) & 5.) It really depends what your marginal tax rate is and what the rest of your portfolio looks like. I would probably go ahead and sell the lots that are long term gains. For the ones you've held for less than a year, I'd probably hold for over a year and then sell them. But again, there are many factors that could influence this decision.

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    • #3
      There are special rules for employee stock purchase plans (ESPP) with regard to taxes. Make sure you check on that. I believe it's 2 years after the option grant date. Any shares older than that, you can sell and just pay long term capital gains on the gains, with the cost basis including the discount you get. Depending on how the company handles the contribution, you might pay taxes on that as well as ordinary income.

      Some would argue to just sell immediately and pocket the difference. So if you get a 15% discount, you essentially earn an extra 15% on the contribution (though you get taxed on that extra 15%). That depends on what you think about the company's stock. I suppose if you're really against holding individual stocks, just sell it for the quick gain, set aside money for the taxes, and invest the rest in an index.

      Fidelity's interface for the ESPP will show you specific tax lots, when they were granted, when they were exercised. When you sell, you can identify what lots to sell (although I've always been a bit frustrated by the fractional shares that are too small to sell).

      It's up to you to keep track of the sales. I use TurboTax and it gets a bit complicated sometimes, but for the most part Fidelity gives you all the information you need at the end of the year.

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