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Nvidia Stock and Capital Gains Taxes: Here’s What to Do.

Nvidia
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The meteoric rise has left investors both dizzy and anxious. And that poses a few questions: Should you take profits off the table? And how can you avoid being assessed capital gains taxes?

Taking profits seems tempting, especially as stocks falter. Shares are up 198% over the past year. If you had the chance to invest $10,000 five years ago, you would be sitting on about $316,000, including dividends and stock splits.

Even if you don’t own the stock directly, you could be exposed through the


S&P500,

where Nvidia represents around 6% of the index. While the stock alone can’t turn the market around, it represents the biggest technology trend in a generation: artificial intelligence. If enthusiasm wanes, the market would suffer a haircut.

All of this makes now a good time to assess Nvidia’s impact on your portfolio, even if it’s indirect. “It’s wonderful to have been on this ride, it’s fun for everyone,” says Louise Goudy Willmering, a partner at Crewe Advisors in Scottsdale, Arizona. “But I think it’s important to not let it become a disproportionate part of your portfolio.”

There is no hard and fast rule as to how much of a given inventory is excessive. If you own Nvidia directly, this could represent more than 10% of your holdings. Most advisors say this is too much and suggest cutting back on spending. You may miss out on additional gains, but consider how you would feel if the stock fell 20%. Academic research reveals that we regret our investment losses far more than we derive joy from our gains.

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If you own the shares of an IRA or other retirement account, you may not have to worry about taxes at this time. Capital gains taxes are generally not assessed in tax-deferred retirement accounts; instead, withdrawals are taxed as ordinary income in retirement.

In a taxable account, you’ll have to pay capital gains taxes on any profits you make. Short-term capital gains on sales of assets held for one year or less are generally taxed as your ordinary income at up to 37%. Long-term capital gains on assets held for more than one year are taxed at up to 20%. Single filers with incomes over $200,000 and married couples with incomes over $250,000 may be subject to an additional 3.8% net investment income tax.

One way to reduce your tax bill is to offset capital gains with losses. Short-term and long-term losses must first be applied to gains of the same duration, but remaining losses can be applied to the other type of gain. If you sell a position for tax purposes but still like the stock, you can always buy it back after 30 days to avoid violating the “wash sale” rule.

Many sectors and stocks haven’t done as well as Nvidia. You’re here
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For starters, it’s down 27% over the past year. If you lost money on Tesla, you can use those losses against your gains.

If you have exposure to Nvidia through an S&P 500 fund, consider swapping some of it for an equally weighted fund like


Invesco S&P 500 Equal Weight

exchange-traded fund, which holds all stocks in the index in approximately the same proportion. You won’t get the mega-cap growth of stocks like Nvidia, but the ETF has grown a respectable 9.8% annualized over the past decade.

Nvidia isn’t the only way to capture the AI ​​theme. Consider companies like Micron Technology and Corning
,

who also benefit from it. You can also replace Nvidia with other growth stocks. John Robinson, a financial planner in Honolulu, Hawaii, likes Costco Wholesale
,

for a. “Their income is a ladder,” he says, referring to consistent annual earnings.

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Don’t just consider taxes; think about what you would like to do with some of Nvidia’s profits. If you’re doing a home renovation, for example, liquidating some of your assets could be a way to finance it, says Dann Ryan, an advisor at Sincerus Advisory in New York.

Certainly, Nvidia stock could regain its footing and rise even higher. But if you sell, you probably won’t regret it. “No one goes bankrupt on capital gains,” says Goudy Willmering.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com

News Source : www.barrons.com
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