What Strategy Would You Use When Selling Shares?

upended on 31/03/2023 - 10:12

TLDR
I need to sell some shares (all from the same company). What are the things I should consider in deciding which share units to sell first?

Details
I have some stocks that I need to sell in the near future. I want to make sure that my selling strategy is correct. Keen to hear your thoughts, OzInvest :).

Let's take this imaginary scenario where I purchased shares over the last 4 years. The table below lists the (made-up) details of the purchases.

ID Date Purchase Price Units Purchased Total Invested
A 30/04/2018 $10 100 $1,000
B 31/10/2018 $12 60 $720
C 30/04/2019 $15 40 $600
D 31/10/2019 $21 20 $420
E 30/04/2020 $24 60 $1,440
F 31/10/2020 $25 60 $1,500
G 30/04/2021 $34 20 $680
H 31/10/2021 $36 40 $1,440
I 30/04/2022 $33 80 $2,640
J 31/10/2022 $29 80 $2,320

In this example, I have invested a total of $12,760 till date in the same company.

Assume I need $6,000, so I decide to sell some of my shares which are currently trading at $30 per share. To achieve this, I will need to sell 200 units in order to get $6,000. Let's ignore any brokerage fees for now. Here is what I am thinking.

I should not sell any shares from lots I and J as these are under 1 year old. Selling these will mean I lose out on any capital gains discount. So I decide to sell all shares from lots H, G, F, E, and D.

ID Date Purchase Price Units Purchased Total Invested Units to Sell Money from Sale @ $30 per Share Profit / Loss
A 30/04/2018 $10 100 $1,000 100 $3,000 $2,000
B 31/10/2018 $12 60 $720 60 $1,800 $1,080
C 30/04/2019 $15 40 $600 40 $1,200 $600
D 31/10/2019 $21 20 $420 20 $600 $180
E 30/04/2020 $24 60 $1,440 60 $1,800 $360
F 31/10/2020 $25 60 $1,500 60 $1,800 $300
G 30/04/2021 $34 20 $680 20 $600 -$80
H 31/10/2021 $36 40 $1,440 40 $1,200 -$240
I 30/04/2022 $33 80 $2,640 80 $2,400 -$240
J 31/10/2022 $29 80 $2,320 80 $2,400 $80

Would this be the correct way to approach this?

Doing it this way means:

  • I get the money I need AND
  • I make a smaller capital gains of $520 with tax only payable on $260.

Selling shares from an even earlier lot will only increase my capital gains since shares back then were purchased for an even lower price. For example, if I sold all 100 units that were purchased on 30/04/2018, the capital gains just for that lot is $2,000.

Which strategy would you pick?

Option 1: Always sell the newer lots first that are just over a year old (so the discount applies). This is illustrated in the example above - selling lots D, E, F, G and H resulting in a capital gain of $520. In general, this approach will result in a capital gain or loss depending upon the rate at the time of selling.

Option 2: Always sell the units purchased at a higher cost compared to the rate at the time of selling. In the example above, this would mean selling lots G, H, I and F. This will result in capital loss of $260 which I can declare when I file my returns. This will help offset any other capital gains from other transactions.

Option 3: Always sell a combination of units that will yield the maximum capital gains. In the example above, this would mean selling lots A, B and C. This means I'll make highest capital gains of $3,680, leading to a higher tax.

Financial

Comments

  • Xistn on 31/03/2023 - 10:31
    +1

    Sell the lot, invest in Ozbikes.

  • Shadowsfury on 31/03/2023 - 10:32
    +1

    May also depend on when you expect to sell the remainder - will your income be in current tax bracket or higher or lower?

    Generally I'd choose Option 2 though, if no expected change in tax brackets

  • freefall101 on 31/03/2023 - 10:49
    +1

    As a general rule, always kick the can down the road when it comes to tax. If you have other capital gains this year I'd trigger the biggest loss you can to offset those, otherwise just aim for zero.

    Only exception is personal circumstances, if you expect to wind up in a much higher tax bracket at some point in the near future. I.e. you know you'll have a big capital gain soon then it may be worth a little pain now to make that easier. But we've got a big drop in tax rates coming soon.

    • upended on 31/03/2023 - 10:51

      Thanks, I posted my comment on capital gains below just as you posted yours. I agree, I will go through all the lots I have and single out those that will trigger a loss when sold. That should help offset the gains from selling the investment property.

  • upended on 31/03/2023 - 10:49
    +1

    If it helps, I have already triggered a capital gains event this FY as a result of selling the investment property. In that case, option 2 will make more sense, as the losses will bring down my overall capital gains.

  • Seraphin7 on 31/03/2023 - 10:57
    +1

    TLDR.

    Generally, you sell the shares that will minimise your current tax liability, while absorbing any accrued capital losses, while giving some consideration to what your future tax position/bracket might be.

  • Daniel Plainview on 31/03/2023 - 10:59
    +1

    @upended
    As someone who used to have a terrible time with managing their own equity purchases I can STRONGLY recommend you sign up for a free account at Sharesight.

    Enter all your purchases in and then you can run reports on CGT to see what the best selling strategy will be - not only that but it provides a myriad of other reports etc which make the paperwork of equity ownership so much easier than doing manually.

    Free accounts have some limitations but you can still do things like making a hypothetical trade - and then running a CGT report to see how that works out vs using other discount methods for the given tax year.

    • upended on 31/03/2023 - 11:01
      +1

      Thank you, I will look into Sharesight. I knew about it, but wasn’t aware you can model different scenarios to determine the best option when selling.

      • Daniel Plainview on 31/03/2023 - 12:51
        +1

        As mentioned - to do this you have to make some fake transactions i.e sell your different possible shares, enter this as a transaction, then run the reports, then toggle the settings to see how that goes or can be accounted for, then when you're done DELETE the transactions (share sales or buys) you didn't actually make.

        I believe on the paid versions you can run reports on such thnigs more easily - but you have to cheat a lil to do this on the free version - which is what I have and it's more than enough for relatively basic investors.

        It's a terrific service and I'd hate to go back to being without it.

        • Will146 on 01/04/2023 - 08:39
          +1

          I also do this through Sharesight. It is a great way to experiment with different selling techniques ie: FIFO, LILO etc. You can also lock trades once you're happy & then just print & hand to your Accountant at tax time. The only thing extra you need to keep a record of is, if you still have losses that can be carried forward to future years. Maybe Sharesight has this option but I haven't found it yet.

  • Drakesy on 31/03/2023 - 13:03
    +1

    Buy High
    Sell low.

    • netjock on 31/03/2023 - 14:08

      Buy low
      Sell lower

      • Drakesy on 31/03/2023 - 14:21

        Ahh someone's doing the old Bitcoin race to the bottom.

        • netjock on 31/03/2023 - 14:53

          Make sure you buy when it is laser eyes. Then sell in a panic.

  • Hearthstone on 31/03/2023 - 17:56
    +1

    you need some sort of software to keep track of this sort of transactions, it makes your job a lot easier when it comes to sell
    with mine every time I sell I have an option to maximize or minimise my capital gain and it work out the rest for me at a click of a button

    If you really stuck send me a PM, If I have some spare time, I will create a fake portfolio in my software and data entry for you and then sell and select minimise capital gain

  • Hearthstone on 31/03/2023 - 18:21
    +1

    @upended
    Ok I got some spare cycle and did the work for you here is the result, best possible outcome is a small capital loss you can use to offset in future years

    https://pic4net.com/pm-ZT4FPY.html

    I used CBA as I need a stock symbol to test data entry

  • upended on 31/03/2023 - 22:58

    Thanks, this is awesome. Did you use Sharesight for this or a different software?

    • Hearthstone on 01/04/2023 - 14:13
      +1

      Different software, I paid once it cost a few hundred bucks many many years ago

      I also use to track my IRR, if IRR doesn’t meet my benchmark end of each year I tried to figure out how I can improve it next year by looking back on on my trades and investment decision

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