While one of the basic rules of investing is to avoid taxes and defer gains as much as possible, the situation today may well be the exception to that rule. I believe now is the time to consider taking some capital gains on long held positions, here’s why:

Taxes are going up: Regardless of who is elected President in November, taxes are almost certainly going up. It’s no secret that the federal government has been spending far more than it makes for some years now and the federal deficits are at a point where they can no longer be ignored. Obama has made an increase in the dividend and capital gains tax rates a major part of his campaign so should he be elected a tax increase is pretty much a given. A McCain victory will by no means guarantee a stable tax rate. Should he be elected he’ll be faced with the imminent expiration of the Bush tax cuts and a democratically led Congress with little interest in extending the lower rates. In a best case scenario McCain may be able to negotiate a compromise where only some taxes get raised but the likelihood of continued low dividend and capital gains rates is very low.

Low markets mean lower taxes: Although the stock and bond market sell-off has been painful, it does present an opportunity to sell some long held positions at smaller gains than were possible a year ago. Provided you reinvest the proceeds you won’t necessarily lock in the current market losses. This is a great time to diversify out of some of the old stocks you may have received as gifts from your parents or grandparents and move on to other, better alternatives. You’ll still have to pay tax on the gain but between the low tax rate and low market values this may be the lowest tax bill on this sale you’ll see for some time to come.

This is a good time to diversify: If you have long held "legacy" positions you probably have some sentimental attachment to them. The current combination of tax timing and market levels should be the nudge that helps you consider finally diversifying the positions. Chances are when your relative bought the stock(s) in the first place he/she wasn’t anticipating it would be held for generations. Further, things change so no matter how good the stock looked when they bought it doesn’t mean it’s still good to own today. Further, there are lots of good stock bargains out there today so if you choose carefully you may find you can do better by upgrading to a stock with better future growth possibilities.

Now’s the time to take a hard look at some of your long held, low cost basis positions. This may be a uniquely good time to take your gains and move on to other things.

Randy Gridley

September, 2008