Basis Trading

Finance allah shmoop what is cost basis or set another

way What is the basis for tax purposes of your

cost in this stock or this investment Like you bought

a stock a twelve bucks chair and now it's a

thirty and you go to sell it So really why

does all this matter One word yet our beals above

word rhymes with smacks is so when a company or

an individual cells something while there are three outcomes the

asset either made money lost money or broke even if

it broke even there's Nothing to do no tax to

pay no paper to be filed ever been pointing out

the cost bases was in fact the net sales price

for the whatever but for gains Well where there are

a lot of taxes to pay the cost basis matters

a lot Think about a share of coca cola your

grandpappy bought in nineteen eighty for about a dollar a

share It's trading at fifty one dollars a share now

so happy jed has a fifty dollars a share gain

that he would realize meaning get taxed on if he

sold that coke stock and turned it into cash will

His cost basis was a dollar a share and his

gain is taxable Gain was fifty bucks a share and

at a long term tax rate of about forty percent

in a blue state that would be twenty dollars in

tax on that fifty dollars of gain and ouch Yeah

After that sale for fifty one dollars a share of

coke he'd be left with only thirty one bucks in

his pocket Enormous tax Painful so painful in fact that

his gain is so much with his cost basis so

low Well that pappy jet is highly incentivized to never

sell that share of coke at least not unless he

absolutely has to In the math here is painful At

fifty one bucks a share coke will earn three bucks

a share this year and three fifty next So if

he nets thirty one dollars a share in his pocket

after the sale well then he's essentially selling coke polo

one of the premier companies in the world at thirty

one over three fifty or just about nine times forward

earnings which is just a crazy low cheap price for

one of america's premier growth companies right And yes it

works the other way around too And no not like

that Had he bought shares of yahoo right its peak

at two hundred bucks a share and then held it

a decade so that it was down teo little forty

dollars a share Amongst that being ali baba he could

realize attacks lost of one hundred sixty dollars a share

by selling it And that loss and a forty percent

tax rate marginal tax rate kind of tax rate world

is actually worth a lot in offsetting tax gains or

tax savings of point four times one sixty or sixty

four dollars a share in tax savings Like you khun

shelter gains by realizing losses Welcome to america So yeah

there's a perverse relationship with pressure toehold versus pressure to

sell when stocks do really well it's painful to sell

them because taxes take such a huge bite out of

your net gains and the opposite is true as well

When you lose money on a stock well you're highly

incentivized to sell that loser shelter gains on your winners

and we'll just move the hell on Want to see

something really freaky Right Go into the bathroom Turn off

The lights and say the word tax me uncle sam

Three times Just a word of warning though We want

to keep a firm grip on your wallet If you 00:03:28.835 --> [endTime] do that there