Nvidia
’s
meteoric rise has left investors both giddy and anxious. And it’s posing some questions: Should you take any profits off the table? And how do you avoid getting slammed with capital-gains taxes?
Taking profits looks tempting, especially as the stock wavers. Shares are up 198% over the past year. Had you been lucky enough 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 might have exposure through the
where
makes up about 6% of the index. While the stock alone can’t topple the market, it’s a proxy for the biggest tech trend in a generation: artificial intelligence. If enthusiasm wanes, the market would take a haircut.
All that makes it a good time to evaluate Nvidia’s impact on your portfolio, even if it’s indirect. “It’s wonderful to have participated in this ride—it’s fun for everyone,” says Louise Goudy Willmering, partner at Crewe Advisors in Scottsdale, Ariz. “But I think it’s important not to let it become a disproportionate part of your portfolio.”
There’s no hard rule about how much of a given stock is too much. If you own Nvidia directly, it might have grown to more than 10% of your equity holdings. Most advisors say that’s too much, and suggest paring back. You may miss out on more gains, but consider how you would feel if the stock declined 20%. Academic research finds that we regret our investment losses much more than we get joy from our wins.
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If you own the stock in an IRA or other retirement account, you might not have to worry about taxes for now. Capital-gains taxes generally aren’t assessed in tax-deferred retirement accounts; instead, withdrawals are taxed as ordinary income in retirement.
In a taxable account, you will owe capital-gains taxes on any profits you take. Short-term capital gains on sales of assets held for a year or less are generally taxed like your ordinary income at up to 37%. Long-term capital gains on assets held for more than a 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 lower your tax bill is to offset capital gains with losses. Short- and long-term losses must first be applied against gains of the same duration, but leftover 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.
Plenty of sectors and stocks haven’t done as well as Nvidia.
Tesla
,
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for one, is down 27% over the past year. If you’ve lost money on Tesla, you could 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 equal-weighted fund like the
exchange-traded fund, which holds every stock in the index in roughly the same proportion. You won’t get the megacap lift of stocks like Nvidia, but the ETF is up a respectable 9.8% annualized over the past decade.
Nvidia isn’t the only way to capture the AI theme. Consider companies like
and
Corning
,
which also benefit. You could also substitute other growth stocks for Nvidia. John Robinson, a financial planner in Honolulu, Hawaii, likes
for one. “Their earnings are a staircase,” he says, referring to steady annual gains.
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Don’t just consider the taxes; think about what you might like to do with some Nvidia profits. If you’re doing a home renovation, for example, liquidating part of your holdings could be a way to finance it, says Dann Ryan, an advisor at Sincerus Advisory in New York City.
Sure, Nvidia’s stock could regain its footing and power even higher. But if you do sell, you probably won’t regret it. “Nobody ever goes broke by taking capital gains,” Goudy Willmering says.
Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
