Personal Finance

I invested over $55k in Tesla's stock - now it's worth $550k and I'm looking for the best tax strategy for selling my position

Kristin Hitchcock

Published: December 2, 2024 8:41 am

24/7 Wall St. Key Points:

• For any investor facing capital gains, the key to success is understanding tax implications and planning your finances accordingly. 
• Reinvesting into a more diverse portfolio is important to reduce exposure to market volatility. 
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

A Reddit post I read in the fatFIRE community shared a remarkable investment success story. The poster turned a $25,000 investment in Tesla (NASDAQ: TSLA) stock in 2019, with an average cost of $17.19 per share, into a combined position now worth approximately $550,000. While I do read a lot of these posts in the fatFIRE community, this one raises a few questions that we can learn from. 

Understandably, the poster is exploring what they should do next. They mention selling the stocks to invest in the S&P 500 or private equity, though they’re seeking to minimize capital gains taxes in Canada. We’ve covered the tax ramifications of large investments before. 

This story is a testament to bold investing. However, that isn’t all it is! It also gives us the opportunity to highlight a few key financial lessons. Here are three takeaways for investors:

1. Celebrate Your Wins but Plan for Taxes

Large capital gains are exciting, but they come with tax obligations. In Canada, 50% of the capital gain is taxable at your marginal rate. For example:

• If you sell for a $500,000 gain, $250,000 is taxable income.
• Depending on your tax bracket, this could mean a substantial bill.

Our advice?

While there are limited strategies to “avoid” capital tax gains entirely, you can reduce its impact:

• Use Tax-Free Accounts: If possible, transfer future investments into a TFSA or RRSP to shelter gains.
• Consider Timing: Spreading sales over multiple years may lower your taxable income annually.
• Offset Gains: Deduct any investment losses from other stocks to offset the taxable portion of gains.

2. Diversification is Key to Long-Term Success

No matter how successful a stock is, it is very risky to hold a single stock, as it exposes you to significant risk from market volatility. TSLA’s highs and lows are proof of this. Diversifying into index funds like the S&P 500 or vetted private equity ventures can stabilize your portfolio.

When selling TSLA, we recommend:

• Reinvest Proceeds: Spread funds across several different assets with varying risk levels. 
• Assess Private Equity Opportunities: Ensure private investments like Starlink or OpenAI are accessible and align with your goals.

3. Partner with a Qualified Financial Advisor

Financial strategies can be complicated, especially when you add tax rules. When large sums are involved, it is often best to work with a financial planner or tax professional. 

Here’s what we would recommend:

• Explore Tax Deferral Options: Look into tax-efficient investment accounts or strategies.
• Plan Holistically: Beyond taxes, a financial advisor can help you align your investments with retirement and your risk preferences. 
• Stay Updated: Canadian tax laws evolve. Professional advice can help you stay ahead of new tax laws and maximize benefits.