Opinion – Grain in Grain: Is it worth not selling a share at a profit just to not pay IR?

One of the biggest behavioral flaws of investors is holding on to their investment. When this occurs, whether at a profit or a loss, the investor always has a reason not to sell. You need to know how to sell. This is not always the best strategy. But you need to calculate the costs and potential of the sale.

One of the justifications used for not selling an asset is the need to pay Income Tax (IR). Paying IR is not pleasant. This is an advantage for those fortunate enough to have an exclusive fund, as they can move the assets without paying it.

However, this is an advantage of few. And for the vast majority of investors? Is it worth paying income tax on profit to switch assets?

That was the question raised by our reader, Mr. Jose Cardoso.

First, it’s important to remember a great benefit that the small investor has and that they often don’t use.

Small value sales, that is, those that add up to less than R$ 20 thousand within a month are exempt from IR.

In this way, the small investor should every month or periodically update the price of their assets at a profit. What does it mean?

Imagine that you bought R$15,000 of Cielo’s shares at the beginning of the year. Cielo’s share appreciated 71%, that is, you would now have R$ 25.65 thousand. Consider that you discovered something very bad today and that you need to sell everything tomorrow to mitigate losses.

If you immediately sell these shares, as the value exceeds BRL 20,000, you would be liable to pay 15% on the profit of BRL 10,650. The IR payable would be R$ 1.6 thousand. This was not the best strategy.

You could have sold up to R$20,000 every month and then repurchased it. Thus, you would not pay IR on the profit in these operations and your acquisition cost would rise. So that when you were going to sell, your IR payable would be minimal. Thus, its profit would increase by almost R$ 1.6 thousand, that is, 15%.

So, the first lesson for the small investor is: update the price of winning positions every month, selling at the end of the day and buying back at the beginning of the next day.

But what about the portfolio of a large investor who has more than R$300,000 in shares and has this reduced first advantage? Is it worth keeping a profitable position just to not pay IR?

This investor has to consider two factors. The first factor is whether you believe the stock has already reached its target price and may eventually go down.

Since the IR is 15% on the gain, you should sell if the potential drop is more than 15% of the past gain percentage.

For example, if you have a gain of 71% as in the example above for Cielo, it would make sense to sell if you believe it could drop more than 10.7% (=71% * 15%).

Let’s see the case of a lower profit. Assume that your gain is 20% on a stock and you believe it has already reached its target price. It would be enough for you to believe in a possible drop greater than 3% (= 20%*15%) to justify the sale.

I’ll address the second decision factor in another article so this doesn’t get too long.

I summarize today’s two valuable lessons. First, consider updating the price of your highest-earning assets on a monthly basis. Second, assess the potential of your assets, as it can pay to sell, even paying IR, and wait to buy at a better price.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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