| GainsKeeper Tips for Tax Smart Trading |  |
| Do you have net realized gains and unrealized losses? | Top |
The IRS allows investors to write off a net loss of $3,000. If you have net realized gains with unrealized losses in your account, you have not optimized your portfolio from a tax standpoint. Let’s test this with real numbers: Suppose you had recognized gains of $8,000 for the year. If these were short-term gains, the average investor (in the 28% tax rate) would owe $2,240 in taxes. By realizing losses of $13,000, that same investor would have a tax credit of $840. That is a difference of $3,080 dollars! In your portfolio, look at the ‘Unrealized Views’ to identify the securities that make up your unrealized losses.
| Do you have net realized losses greater than $3,000 with unrealized gains? | Top |
If so, you can realize gains without any tax consequences, up to the point where you are left with a $3,000 net loss. This is a great opportunity to realize gains tax-free. Those gains may not be available for you next year. If you have a net loss of $12,000 for the current year, you can realize $9,000 worth of unrealized gains without paying another nickel in taxes. In your portfolio, look at the ‘Unrealized Views’ to identify the securities that make up your unrealized losses.
| Do you have unrealized losses in your portfolio, but no realized activity? | Top |
If you have purchased stocks during the year, but have not sold anything, resulting in no gains or losses, it is likely that you can find losses of $3,000 in your portfolio. The IRS allows investors to recognize a $3,000 trading loss, which for the average investor in the 28% tax bracket, amounts to a tax savings of $840. In your portfolio, look at the ‘Unrealized Views’ to identify the securities that make up your unrealized losses.
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Do you have holdings with large unrealized losses? |
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This is an important tactic to remember in a volatile market. Investors often keep securities that they believe will perform well long-term, but are currently giving them a short-term loss. By doubling up your position in that security at the current and lower cost, and waiting more than 30 days to sell the original lot, you can lower your cost basis without incurring a wash sale. For example, let's say you bought 100 shares of Amazon at $60. It's now trading in the $20's. You may think it's a good long-term investment, but at $25 you are showing an unrealized loss. You could sell this lot and take the loss, but you'd have to wait 30 days to buy it back in order to avoid a wash sale. In those 30 days Amazon’s market price may rise and you miss the appreciation. So, instead of selling, buy another 100 shares at $25. Then after 30 days, sell your first lot and realize the loss, therefore lowering your tax liability. Now your Amazon stock is at a much lower cost basis. Note: To utilize this strategy you must purchase the second lot by November 28, so you can wait out the 30-day wash sale period and sell the original lot on the last trading day of the year, December 29th.
| What is Tax Smart Trading? | Top |
Every investor trades to maximize their gains and minimize their losses. Understanding the taxation on investments is important because it can save you real dollars. Tax Smart Trading is the ability to implement tax strategies into your trading activity to allow you to minimize your tax bill at year end (and maximize your profits!). GainsKeeper provides you with what we consider the most important tax saving strategies available to the average investor. Implementing these strategies will ensure that you will not pay more to the IRS more than you really need to. Note: Tax strategies should only be a consideration (albeit an important one) when executing transactions, but not the sole basis on which your decision is made.
| When to use Tax Smart Trading Strategies? | Top |
Tax strategies are only implemented at year end, correct? No! Althoug a common belief amongst investors, this statement could not be more erroneous. Tax planning should be a consideration in all your trading decisions, throughout the year. Familiarize yourself with all the relevant tax strategies so you can quickly review the tax consequences of your transactions prior to trading.
| Time Value of Money | Top |
A basic principle of finance is "A dollar today is worth more than a dollar tomorrow." The tax version of this principle is "Paying taxes in the future is better than paying them now." If possible, hold off from selling and recognizing gains until next year. That way you can defer taxes and increase the ‘value’ of this money.
| Sell partial positions using Specific ID | Top |
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 instruct your broker to sell shares from the specific lots that will be the most advantageous from a tax standpoint (instead of the default method First-In, First-Out (FIFO)). In most instances you should sell the shares with the highest unit cost first, thereby minimizing your gains and your tax burden. You should also take into consideration whether the lot is short-term or long-term before selling. In your portfolio, look at the ‘Unrealized Views’ to identify which security lots have the highest cost, as well as those that are long or short term.
| Know the wash sale rule? | Top |
If you are active in a particular stock, it is imperative that you monitor your wash sales period before you re-purchase the stock. After you have taken a loss, you need to be aware of the date you can repurchase a security and still recognize the earlier loss. Investors may find themselves unable to realize significant losses due to wash sales. If you re-purchase a security 30-days before or after you sold it for a loss, that loss is disallowable (and added to the cost basis of the new tax-lot).
| Be aware of your holding periods | Top |
Since the tax rate for short-term gains is significantly higher than for long-term gains (up to 37% versus 10-20%), it's often wise to realize losses on lots before they become long-term holdings, thereby lowering your short-term gains. In contrast, you should wait for a winning position to become a long-term holding before selling, in order to take advantage of the lower tax rate. The tax savings could be significant. Keep an edge year-round by monitoring both your realized and unrealized positions. In your portfolio, look at the ‘Unrealized Views’ to identify security lots that are short term or long term and to get a count on how many days before short term lots will become long term.
| Filing Tips | Top |
One final warning to remember when filing your 2000 tax return: Be sure to provide accurate backup documentation of your trading records. This will appease the IRS and minimize the chances of an audit on your return. Also, be sure to include backup confirmations from your broker on all Specific ID sales. Rule of thumb, if you can’t figure out your own report, chances are the IRS won’t either. Avoid an appointment with an IRS agent next summer looking to decipher your records; include the full GainsKeeper Realized report with your Schedule D and taxes.
| Additional Help | Top |
GainsKeeper strives to support your trading activities with pertinent information along with our best of class portfolio analysis tools. If you are looking for additional tax planning assistance, we recommend you consult your tax advisor for a more customized approach.
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