It’s been a little over a year since Upstart Holdings (NASDAQ:UPST) went public at $20 a share. If you bought UPST stock in the initial public offering (IPO) and are still holding, you are up about 545%. 

I’m sure many investors who bought IPO shares in the artificial intelligence lending platform probably sold in the final quarter of the year. 

If you did, congrats on your realized profits. However, I think you’ve made a big mistake for two reasons. If you haven’t sold and still own it, don’t.

Here’s why. 

Forget the Capital Gains on UPST Stock

Wealthy investors were likely selling their biggest gains in the final quarter of the year with the knowledge that President Joe Biden’s tax plan could include an increase in the long-term capital gains rate to 25%. 

However, we now know that the Build Back Better Act does not contain such a provision. As a result, most investors continue to pay 15% on long-term capital gains. 

Here is a synopsis of the capital gains tax rate from the Internal Revenue Service’s website:

“A capital gain rate of 15% applies if your taxable income is more than $40,400 but less than or equal to $445,850 for single; more than $80,800 but less than or equal to $501,600 for married filing jointly or qualifying widow(er); more than $54,100 but less than or equal to $473,750 for head of household or more than $40,400 but less than or equal to $250,800 for married filing separately.

“However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.”

So, let’s say you bought 1,000 shares of Upstart in December 2020. That’s a $20,000 investment. Further, we’ll assume you sold at its 52-week high of $401.49. That’s a capital gain of $381,490. Assuming you’re in the 15% bracket, your tax is $57,223 [$381,490 multiplied by 15%]. Based on 25%, the tax payable jumps to $95,373, or 67% higher. 

Ouch. 

However, if you bought in the December 2020 IPO and sold at the October 2021 high, you would be deemed to have generated a short-term capital gain. As such, those gains would be taxed as ordinary income. 

So, if your household earned $81,050 from your day jobs in 2021, you would pay $9,328 in tax [based on married, filing jointly], or about 12%. Unfortunately, your short-term gains would be taxed as ordinary income, bumping up your taxable income from $81,050 to $462,540, increasing your tax rate from 12% to 35%.   

In a nutshell, by selling your Upstart stock in September to avoid a potential 25% capital gains tax, you incurred a 35% tax in doing so. 

The good news, in hindsight, is that you sold at the high. The bad news is that it very well could revisit $400 in 2022. At which point, you could sell and pay between 15% and 20% in taxes as a long-term capital gain, depending on your taxable income for the year.  

Okay. Enough of the tax analysis. 

What About the Company?

The last time I wrote about Upstart was in early November. At the time, it was trading at $314, much higher than where it currently sells, around $129. I argued that it had an excellent shot at becoming a $1,000 stock before too long. 

Here’s what I said:

“Zillow was using AI to figure out how much to pay for houses in different markets. But, as I said earlier, that’s a tough gig given how people’s plans and ideas can change quickly. 

“Meanwhile, Upstart is using AI to refine the customer acquisition process for lenders. That’s a service rather than an investment. As such, I would call its business model ‘asset-light.’”

In November, Upstart reported third quarter 2021 earnings that included a 250% increase in revenue to $228 million and an operating profit of $28.6 million, up 134% from $12.2 million a year earlier. 

“Since Upstart’s IPO a year ago, we’ve more than tripled our revenue, tripled our profits, tripled the number of banks and credit unions on our platform, and tripled the number of auto dealerships we serve,” Chief Executive Officer Dave Girouard said in its third-quarter 2021 press release. “With that many 3s, Upstart is becoming the Steph Curry of the FinTech industry.”

Unfortunately, both analysts and investors were underwhelmed by the company’s fourth-quarter guidance. As a result, its shares fell more than 18% on the news. In the two months since then, UPST shares have gradually declined from the $200s to below $140. 

Can you say, “opportunity knocks?”

The Bottom Line on UPST Stock

How many fintechs do you know that are growing the top line by more than 200% and profitable? Not many. 

For whatever reason, investors have chosen to group Upstart in with the Zillow’s of the world, and that’s not accurate. Ultimately, I might turn out to be wrong about Upstart, but I don’t think that’s going to happen. 

UPST stock should be a top buy for risk-tolerant investors early in 2022. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.