|
Realize
a Short-term loss before it becomes Long-term
Since
the tax rate for S-T gains is significantly higher than that for L-T
gains
(up to 35% versus 5-15%), it's often wise to realize losses on lots before
they become L-T holdings, thereby lowering tax exposure. In contrast,
you
should wait for a winning position to become a L-T holding to take
advantage of the lower tax rate.
The savings could be significant.
BACK
Realize
gains tax-free if you have net losses greater than $3,000
The IRS allows a $3,000
capital loss. Any investor with a capital loss greater than $3,000 can
realize capital gains for the
difference. Here are a few scenarios with some hard numbers. An
investor has a net loss of $17,000 for the current year. That investor can
realize $14,000 worth of unrealized gains without impacting current year
taxes.
Or, let’s say that you had purchased stocks during the year, but have not sold anything,
resulting in a zero gain/loss. The IRS allows investors to recognize a $3,000 trading loss which, for the average investor
in the 28% tax bracket, amounts to a savings of $840.
Let's say the same investor has recognized gains of $10,000 for the year. By realizing
losses of $13,000, they would save $3,640!
But, obviously, to take advantage of this, investors must know their true net
gains/losses BEFORE the end of the year.
As
we all know, paying taxes in the future is better than paying them now. If
you can, hold gainers until next year.
That way you can defer taxes on that gain one full year. Gifting
a stock? Always gift stock lots
with lower cost basis and short-term if possible and keep the higher cost,
longer-term lots. This will save you real tax dollars in the long run.
BACK
Sell partial positions using Specific ID
Many
investors still fail to maximize the benefits by selling specific lots. Keeping track of your stock purchases at the lot level allows you to direct your broker to sell
share lots that will be the most advantageous from a tax standpoint
(instead of the default method FIFO (First-In, First-Out)). In most
instances you will be selling those shares with the highest unit cost,
thereby minimizing your gains and your tax burden. Even
mutual funds can be sold using FIFO, Specific ID or Average Cost. You
should choose which is most beneficial to your tax bill.
BACK
Be aware of Mutual Fund distributions before purchasing
a fund
Two
other sell methodologies that are only applicable for Mutual Funds are Single
Category Average Cost and Multiple Category Average Cost. Using the
Single Category method you add up the cost of all your shares and divide
that by the number of shares. This is the cost per share used to calculate
a gain or loss.
With
the Multiple Cost method, investors need to average the cost of all their
long-term shares and their short-term shares separately. When selling shares
an investor needs to identify whether they are selling long or short-term
shares and use the appropriate cost calculation.
BACK
Adjusting the
Cost Basis of L-T Investments
This
is an important tactic to remember in a volatile market. Investors often hold
securities that they believe will perform well long-term, but currently
hold a short-term loss.
Doubling up your position in that security at the lower cost, and waiting more than 30 days
to sell the original lot, can effectively lower your cost basis without
incurring a wash sale.
For example, let's say you bought 100 shares of Amazon at $80. It's
now trading in the $40's.
You may think it's a good long-term investment, but at $40 you are out of the money.You could sell and take the loss, but you'd have to wait 30 days to get back in or you would incur a wash
sale.
In those 30 days Amazon could rise and you would be left behind. So,
instead of selling, you buy another 100 shares at $40.
After 30 days your sell the first lot, realizing a large loss which lowers your tax
liability, and you now own Amazon at a much smaller cost basis.
BACK
Know the wash sales rule
If you are active in a particular stock, it is
imperative that you monitor your wash sales period before you
re-purchase the stock. Investors need to be aware of the date they
can repurchase a security when that security had been sold for a
loss. Investors may find themselves not being able to realize
significant losses due to wash sales.
Proactively tracking wash sales will prevent you from
purchasing the stock in a wash sale period.
Nothing
would be more frustrating than selling stock at a loss to
offset your tax bill only to find out after Jan 1 that a wash
sale disallowed the loss.
BACK
Open
a SiebertNet
account now and get a discounted subscription to all of GainsKeeper's tax-smart
investing and tracking tools. (Find it on the Premium
research page in the Brokerage Center.)
|