Prioritizing Tax Consequences Over Risk

Have you ever said to yourself, “I don’t want to sell because I will have to pay taxes”?

The “South Indian Monkey Trap” mentioned in the book, Zen and the Art of Motorcycle Maintenance, by Robert Pirsig, is a metaphor for being trapped due to not letting go of something.

The monkey has his hand stuck in a jar that is tied to a tree.  The reason his hand is stuck in the jar is because he will not let go of the fruit in the jar.

Human nature drives us to keep winners and sell losers, especially if the winners include paying taxes on the gain.  We all like to say, I own XYZ stock, and I have made an incredible return on this stock.  This gives the impression that all of our selections have had similar results.  Daniel Kahneman spoke to this as the endowment bias, in his book titled, Thinking Fast and Slow.  The endowment bias is the behavioral trait that leads us to believe that what we own has more importance than it is truly worth.  The consequence of this behavior is our losses and gains seem much greater than they truly are.

Let’s look at some common examples of how not selling for taxes can affect your wealth.  I am going to show you three different stocks.

Nvidia had a return of over 171% for 2024.  If you invested $100K in this stock on December 31, 2023, you would have had $271,254 in your account at the end of 2024.  If you sold the stock on December 31, 2024 you would have had a tax consequence of $25,688, provided you were in the 15 percent capital gains bracket.  If you did not sell, today you would have a loss of $55,714 from your value on December 31, 2024.  The loss is more than double what the tax liability was.

The following table gives an example of two companies and one ETF.  The companies are Nvidia, KKR (private equity firm), and SPY (ETF which represents the S&P 500 index).

As you can see in each case, the amount of the tax payment for 2024 is less than the loss each stock has experienced since the beginning of 2025.  While holding the stock will allow you to say I currently have a positive return in the stock, there is no denying your actual wealth is less than if you would have sold and paid the taxes.

Beware of holding on to a position which is trading at an extreme to its relative value.  When evaluating your stock position, it is important to ask a vital question.  Would I buy more of the stock at its current price?  Try to make sure you are not trapped to a market because your hand is stuck in a jar holding on to a risky stock.

You can refer to the IRS capital gains tax rates here.

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