The problem with cashing out of Netflix

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This week after Netflix reported stellar first quarter earnings, the streaming video service hit $213.75 per share—a level last seen in September 2011, just before CEO Reed Hastings announced the (soon scuttled) plans to spin off Netflix’s DVD-by-mail service. Let the good times roll!

Well, not really. The recent investors with the most to gain from their positions (those that bought in before the earnings surprise in January) are now confronted with a tax dilemma: cash out now and pay steep taxes, or let it ride and take advantage of a lower rate. Investors who hold US equities for less than 1 year are subject to paying ordinary income tax rates on the capital gains. Investors who hold for longer need only pay the 15% or 20% capital gains rate, depending on their income bracket.

For example an investment of $1,000 in Netflix shares on August 3rd at its 52-week low of $52.81 would now be worth $4,047.53. A high income investor who made this trade and wanted to sell the stock now would see a $3,047.53 gain taxed at 39.6% resulting in a total return of 184% amounting to a $1,840.70 gain. If the investor waited until August to sell and the stock price remained the same, the after tax return on the trade would be 244%, for a $2,438.02 gain.

Of course there is no guarantee that the volatile Netflix shares will stay at their current level of $213.75 per share. But as long as the share price stays above $174.32, an investor in this situation would still make more money by waiting.