Key insights
- The post explores a hypothetical scenario of selling a stock with gains to reinvest at a lower price, considering the impact of immediate capital gains taxes versus long-term holding. While acknowledging the risks of market timing, it seeks a mathematical threshold for a price drawdown that would offset the tax penalty and lost compounding. The question is purely theoretical and does not offer actionable market insights.
Let's say I own a stock with some gains. Is there a mathematical formula to determine if it would be more profitable to sell now, pay LTCG and reinvest at some later date with a slightly lower entry price vs. just holding and paying LTCG in 10 years? Or in other words, is there a specific drawdown % required to offset the immediate taxes and loss of associated compounding in the long run?
I understand taxes shouldn't drive investment strategy, timing the market is bad, etc. I'm just curious from a mathematical standpoint.
EDIT: To clarify, I'm not asking if it's possible to time the market, or if it is a good idea to attempt to do so, I'm well aware that it's not. I'm asking a purely mathematical question regarding how much of a favorable discount one has to receive to offset the tax penalty from selling immediately.