Question

As you recall, I was lucky enough to win big at the casino back on New Year’s Day earlier this year (thanks for celebrating with me). I took the $3,000 I won and bought 100 shares of stock in that cool new smartphone app company, TriviaAddiction. I just love playing that game. Anyway, the stock has done well, and I am thinking of selling before year end now that the price has reached $240 per share. Since you are my tax adviser, I thought I’d ask a couple of questions:

1. Is there any reason to wait and sell later?

2. If I don’t sell, the price might go down (TriviaMaster seems to be replacing TriviaAddiction as the “hot” new game). I’m thinking the price might be as low as $220 by early next year.

My taxable income this year and next year is expected to be $38,500 (not including the stock sale). I think that puts me in the 12% tax bracket? Any suggestions on what I should do?

Thanks!

Sue

Please advise your friend Sue and addressing her questions in your initial post. Be certain to include estimates of the different after-tax outcomes she is suggesting. Sue is a single taxpayer and not a tax expert and so your language should reflect her limited understanding of tax law and avoid technical jargon. Although Sue is your friend, she is also a client, therefore, the information presented in your post should reflect your professionalism and expertise in the matters concerning her.

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Please check your initial post for comments or questions from me and be sure to provide a comprehensive response, as requested.

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Answer 1

Ans Sue's Taxable income

option 1) If Sue sold shares in the current year

Particulars		Amount ($)
		Current year	Next year	Total
Income before Capital gain on shares		38,500	38,500
Winning from Gambling		3,000*
Capital gain from sale of shares		21000
Total Income		62,500	38,500	101,000
Tax(12%)		7500	4620	12120
Net Income after tax		55,000	33,880	88,880

Option 2) If Sue sold share in next year beginning

Particulars		Amount ($)
		Current year	Next year	Total
Income before Capital gain on shares		38,500	38,500
Winning from Gambling		3,000*
Capital gain from sale of shares		0	19000
Total Income		41,500	57,500	99000
Tax(12%)		4980	6900	11880
Net Income after tax		36,520	50,600	87,120

As the net income after tax is more in option 1 therefore Sue shall sold the shares in current year

Assumption: * it is assumed that winning from gambling does not incurre in next year and taxable income before sale of share does not contain income from gambling

Working Note

Computation of capital gain		Amount ($)
Capital gain from sale of shares		Current year	Next year
Number of shares purchased		100	100
consideration for the sale of share	( 240*100)\(220*100)	24000	22000
Purchase cost		3000	3000
Capital gain from sale of shares		21000	19000