In early 2011, Jim bought 1,000 shares of ABC Co. for $10,000. Since then, the stock price has increased and is now worth $110,000, with the value holding steady. It is unlikely that Jim will keep the stock for more than a year or two longer.
If Jim sells the stock in late 2012, he will pay $15,000 [($110,000-$10,000) x 15%] in taxes. If he waited until 2013 to make the sale and the tax rate increases as scheduled to 20%, and he is subject to the 3.8% Medicare surtax, he will pay $23,800 [($110,000-10,000) x 23.8%] in taxes.
By selling in 2012, Jim will save $8,800 in taxes, which equates to a 58.7% savings on his $15,000 tax payment for his 2012 tax return vs. his $23,800 tax payment for his 2013 tax return.
If Jim thinks that ABC Co.'s stock will continue to appreciate in 2013, he can immediately repurchase the stock. Therefore, he will step up his tax basis of the stock to the current fair market value of $110,000.