Berkshire Hathaway (BRK.A.N) began liquidating its large stake in the bank company in mid-July and has sold approximately 15% of its holdings.

When will Berkshire Hathaway stop selling Bank of America (BAC.N) stocks?

Berkshire Hathaway began liquidating its large stake in the bank company in mid-July and has sold approximately 15% of its holdings. This sale was quite aggressive, with a total value of about $6 billion. (According to its recent filing on August 30, Berkshire Hathaway still holds 0.883 billion shares, accounting for 11.3% of the shares, worth about $35 billion.)

This sale has triggered speculation about when CEO Warren Buffett will stop selling Bank of America. He manages Berkshire Hathaway's $300 billion stock investment portfolio. These sales have put downward pressure on Bank of America's stock, and the stock performance has not been as good as its peers since Berkshire Hathaway started its selling plan. At Thursday's close, the stock fell 0.9% to $40.14.

Berkshire Hathaway may stop selling when its holdings decrease to 0.7 billion shares. Taxation and history will be the reasons.

Berkshire Hathaway accumulated its Bank of America stocks at different prices in two stages. Berkshire Hathaway's initial investment was in 2017 when it exchanged 0.7 billion common shares for $5 billion of Bank of America preferred stock through the stock warrants it acquired in 2011.

Berkshire Hathaway got a sweet deal in the 2011 transaction. At that time, Bank of America was seeking Buffett's endorsement and the bank's stock price was weak, below $10 per share.

Berkshire paid approximately $7 per share for the initial holding of 0.7 billion common stocks. The remaining part of Berkshire's shares, over 0.3 billion shares, was mostly purchased in 2018 at a price of around $30 per share.

Due to the low cost basis, the current stock price of Bank of America is around $40. Berkshire faces a high tax burden when selling the initial 7 million shares, while the tax burden on the sale of the remaining shares is relatively lighter. Berkshire is required to pay a corporate tax of approximately 25% (including local tax) on any stock sales, which is very noticeable.

Berkshire may bear a tax burden of $2 to $3 per share when selling high-cost stocks, while the tax burden per share may be $8 when selling the low-cost stocks purchased at $7 per share.

New York tax expert Robert Willens said that like individuals, companies can specify specific shares when selling stocks with multiple cost levels.

Willens told Barron's in an email: "If the stocks are held by a broker, the taxpayer can specify the specific stocks to be sold to the broker, and subsequently, the broker confirms this specification in writing within a reasonable time, which constitutes sufficient identification."

He assumes that Berkshire will identify the high-cost Bank of America stocks in the recent sales to minimize the tax burden as much as possible.

If the seller does not specify, the "first in, first out" (FIFO) accounting principle usually applies, meaning the earliest purchased stocks will bear any profit tax burden.

Buffett generally dislikes tax burdens, which may prompt him to retain the original 7 million shares. He may also consider his loyalty to Bank of America's CEO Brian Moynihan, whom Buffett has praised in the past.

Another reason Berkshire holds shares in Bank of America is that, in recent years, it has sold shares of Bank of America, Bank of New York Mellon (BK.N), JPMorgan (JPM.N), and Wells Fargo & Co (WFC.N), making Bank of America the only major stock in traditional banks for the company.

However, Buffett often cancels the stocks he holds after starting to sell them, just as he did with other bank stocks. Berkshire did retain a small amount of shares of Citigroup (C.N), about 3 billion dollars.

Because Berkshire holds more than 10% of the shares of Bank of America, it must submit any applications for the sale of Bank of America shares within two working days. The conglomerate needs to reduce its shareholding to about 0.777 billion shares, which is about 0.1 billion shares lower than the current level, in order to avoid the requirement to declare within two working days.

It should be mentioned that taxes did not stop Buffett from selling over half of Berkshire's shares in Apple (AAPL.O) this year - estimated at $85 billion or more. Barron's Magazine estimates that most of the stocks sold by Berkshire in the second quarter may owe $15 billion in taxes.

At present, Berkshire holds 0.4 billion shares of Apple, and Barron's Magazine believes that Buffett may have completed the shareholding reduction of Apple shares to this whole number, which is the same quantity as Berkshire's holdings of Coca-Cola (KO.N) for over 20 years.

Buffett may like round numbers, and 0.7 billion may be the right number for Bank of America.