Sale of a concentrated position may trigger a large capital gains tax liability. A large concentrated position is often accumulated and held for many years, resulting in a zero or low tax basis. (quote from Kaplan Book)
Usually, how the cost basis increase? Thanks.
Cost basis is the price as which the asset was purchased. What the text is saying is that a large concentrated position is usually the result of price appreciation of the asset. This means that the asset value is significantly higher than the cost basis. Cost basis, as far as I understand, does not increase nor decrease.
Thanks kjsgbp,
Sry, but still not fully understand, use Kaplan Example:
$1,000 is invested for 20 years at a return of 10%. Assuming a capital gains tax of 30% and a cost basis of $750, calculate the after-tax value of the account in 20 years.
Question: Why initial invest amount is 1,000 but the cost basis is 750?
the cost basis is today’s value. Initial investment value was 1000.
^ isn’t it the other way around? Cost basis is the original investment value, today’s value is 1k?
750 is the original value. It appreciated in market value to 1000. the 250 is taxable.
Think Roquefort cheese. With time, fungus grow, smell gets nastier, taste gets sour, market value increases.
Thanks!
Hi CPK, why you say cost basis is today’s value? Thanks for advice.
sorry … was a typo. Galli corrected me soon after. It is the price the original security was acquired at. And that may be way below its current market value.
That difference is what you would be paying the capital gains on.
In the case of a large concentrated position that you still hold - you acquired it at say a low value, it still remains at low value (since you did not sell it yet) – so there is zero or a very low tax basis to determine capital gains. That capital gains tax is only triggered when you sell it at the current market value.
Thanks Cpk!
Can we say cost basis will only move if there is additional position is added in?
For example, employee got the stock from employer every year. It’s the weighted average price?
each piece will have its own cost basis.
may I know in that case, why is the cost basis in a tax deferred account = 0?
Im assuming that B = 0 since FVIFAT = (1 + r)n(1 - tcg) + tcgB, ==> FVIFAT = (1 + r)n(1 - tcg) for tax deferred account
In case of zero cost basis, means that whole tax basis is taxable. Assuming the value of portfolio for determining tax base has been started from zero. It might be in cases as tax payer received portfolio as a full taxable gift. In some other cases, Authority may argue that cost basis is zero when tax payer did not provide valid tax fillings.