| Specific ID Selling
Most investors are not aware of the influence they can have over calculating their gains and losses. When you perform a sale of a position that you had multiple purchases for, you can identify the specific share you are selling (Specific ID selling.) In order for the IRS to recognize a Specific ID sell, you must tell your broker at the time of the sell transaction, which shares (each purchase is considered a separate lot) to sell by referencing the purchase date and the purchase price. Your broker must then respond to you with a written confirmation of these instructions. You cannot decide during year-end tax preparation which lots were sold by Specific ID. You must designate the shares at the time of the sell transaction. If you do not specify the share you are selling, your shares are sold on the FIFO basis (first in, first out.) This is the default selling method used by brokers and the IRS. Why is Specific ID selling so important? You can use this selling strategy to reduce the taxes you have to pay the Tax Man by selling your highest cost shares first. Or, you can sell a lot that has a loss, to use to offest a gain you realized on a prior date. Here is a simple example that illustrates the power of this strategy:
By specifiying that your sale on 5/1/00 is being sold against your 3/1/00 lot, you will realize a short-term loss of $500
that you can use to offset any gains that you realize throughout the year.
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If you are invested in a company that is in a deep losing position, you can take advantage of that loss by doubling your position and lowering your average cost. That is the basics of investing. But what if you don't want additional shares in the long-term? You can still take advntage of your losing position by purchasing an additional lot of the security today - then wait 31 days and sell your original position. Using this strategy you will have the same number of shares 31 days from now, but you will have recognized a large loss for tax purposes. You need to wait 31 days to avoid a wash sale.
; BACK This is a very timely strategy. There are millions of us who have fallen prey to the 'Dot Bomb' out there and have stocks in their portfolio that are down 90-95%. Many of us will never sell these stocks because we think it is barely worth the commissions we would pay when selling them. That could not be further from the truth. Selling these stocks will enhance your after tax performance. Let's suppose you paid $6,000 for stock that is now worth $300. By selling that stock you will receive $300 in cash, but more importantly, you will recognize $5,700 in losses. The IRS allows you to write off $3,000 in losses against your income, so if you are in the 31% tax bracket - this will save you roughly $1,000 on your taxes, and you will be able to recognize $2,700 in gains throughout the rest of the year without any tax consequence. If you have dogs in your portfolio that you don't like, sell them! &
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GainsAdvisor's Sell Decision Tool assigns a proprietary Sell Grade to all your holdings, ranking them by how tax advantageous they would be to sell. You can even use the Sell Decision Tool to simulate selling a combination of securities to understand the tax consequences of your sale. Using the Sell Decision Tool will dramatically increase your after tax portfolio performance. Learn more about GainsAdvisor
You can use a Short-Term (ST) loss to offset your ST gains. The tax rate for ST gains is significantly higher than the rate for Long-Term (LT) gains (up to 35% vs. 5-15%.)
It is often in your best interest to realize losses on lots while they are short-term, to lower your ST gains.
& nbsp; &n bsp; BACK The IRS allows individuals to claim up to $3,000 per year in capital losses ($1,500 for each spouse when married.) Any investor with a net capital loss greater than $3,000 should realize capital gains for the difference. For instance, if you have a net loss of $17,000 for the current year, you can realize $14,000 worth of gains without impacting your current year taxes. Also if you had purchased stocks during the year, but have not sold anything so you currently have gains or losses, chances are good that you can find $3,000 in losses in your portfolio. By recognizing this $3,000 trading loss, the average investor in the 28% tax bracket would save $840. Or you had recognized gains of $10,000 for the year. If you realize losses of $13,000, you wold save $3,640. Obviously to take advantage of this strategy, you must always be aware of your true net gains/losses throughout the year.
& nbsp; &n bsp; BACK While this is not a trading strategy, it is an important rule you need to bear in mind when enacting your strategies. When you sell and realize a loss, you want to ensure that you understand the wash sale rule so that you do not create a situation where you need to defer that loss. The IRS created the wash sale rule to prevent taxpayers from realizing "artificial" losses for tax purposes and then buying back into the same security. You cannot deduct losses from securities if you re-purchase that security either 30 days before or after you sell it for a loss. If you do repurchase the security within the 61-day window, the loss is deferred and added to the cost basis of the new lot. This is a confusing and complex rule. To manually monitor and adjust for wash sales is extremely difficult. Example:
**Original total cost is $5,000, but this buy creates a wash sale. The $3,000 loss from the 8/12/00 sale is disallowed and added to the cost basis of the 9/10/00 purchase.
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