|
|
|
|
|
|
StockCentral :: Community
|
|
Join in on the discussion with other like-minded investors in our community forums. Learn about the fundamental investing methodology and participate in educational workshops in the Investing forums, stay up-to-date on StockCentral news and make suggestions to the StockCentral team in Central Square, and discuss your favorite stock or recent market news in our A-Z ticker-based forums.
|
| Note: You must be a StockCentral subscriber and logged in to post messages. |
|
|
| Author |
Messages |
|
Doug Gerlach
Cambridge, MA
http://www.iclub.com/
President, ICLUBcentral
 |
| 03/07/2007 11:01 PM |
|
Most of us have taxes on our minds at this time of the year, and that brings us to our next task in reviewing our portfolio:
7. Consider selling stocks in order to generate capital losses that offset capital gains.
This only applies to stocks that are held in non-tax-advantaged accounts (in other words, stocks that are not held in your IRA, SEP-IRA, Roth IRA, 401(k) or other accounts that provide for the deferral or avoidance of taxes on gains).
In your "regular" brokerage account, however, whenever you sell a stock at a gain, you need to pay taxes on those gains. Let's review the rules surrounding capital gains and losses.
Capital gains and losses come in two varieties -- short-term and long-term. If you hold a security more than one year, any capital gain or loss is a long-term capital gain or loss. If you hold the property one year or less, any capital gain or loss is a short-term capital gain or loss.
To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period. If you bought a security on February 5, 2006, and sold it on February 5, 2007, your holding period is not more than one year and you have a short-term capital gain or loss. If you sold it on February 6, 2007, your holding period is more than one year and you have a long-term capital gain or loss. The holding period begins the day after the trade date and ends on the trade date.
There is a significant tax advantage for long-term capital gains compared to short-term gains. For most people, the capital gains tax rate is currently 15% on long-term gains (it drops down to 5% for individuals in the lowest two income tax brackets). For short-terms, you pay capital gains taxes at the same rate as your ordinary income tax rate. If you're in the 28% tax bracket, you'll pay 28% on your short-term capital gains. As you can see, there are significant advantages to avoiding short term gains if possible.
In a single year, any capital losses that you incur will offset any capital gains that you have, in effect wiping out any capital gains taxes that you might otherwise have to pay. If your capital losses exceed your capital gains, up to $3,000 (or $1,500 if you are married filing separately) can be applied to reduce your ordinary income. If you have more than $3,000 in capital losses, you can carry forward the losses to apply to gains and then ordinary income in future years.
The real trick in minimizing the impact of taxes on your investment portfolio, then, is to strive to be tax-neutral, with losses offsetting gains (or the most of the gains) each year. Usually, investors consider the tax implications of their portfolios near the end of the year, looking to see if any securities could be sold at a loss to offset gains recorded during the year. But it's something that you can keep in mind throughout the year, especially if you're working to determine if a poorly performing stock should be held or sold -- the balance may be tipped when you realize that selling the stock at a loss can prevent paying taxes on capital gains that you've already realized.
One way to look at the tax implications of selling a stock that you're holding a loss is to remember that you can always repurchase a stock later on. If you're uncertain about a stock, sometimes it makes sense to capture a capital loss now and review the stock in a month to see if you might want to purchase it again for your portfolio. Sometimes the exercise of re-evaluating a stock that you've bought and sold once can bring new insight to your decision making process, once you've loosened the ties that bind you to the company.
You must beware the wash sale rule in these cases, though. The wash sale rule says that if you sell a stock at a loss, you can't repurchase the same stock until 30 days have passed. If you do, your loss is disallowed (in other words, the sell is a wash).
Keeping track of capital gains and losses that you incur throughout the year is an important part of portfolio management. A program like Investment Account Manager (www.investmentaccountmanager.com) is really key to simplifying your recordkeeping and helping you to manage the tax implications of buying, selling, and holding stocks. In looking at your currently under-performing stocks, what are the possible capital gains or losses that you might be triggered when selling? If you already have some gains, selling a stock at a loss can be a smart way to reduce your eventual tax liability.
One final rule of thumb about managing capital gains -- there's an old saying on Wall Street that "you'll never get rich selling for a tax loss." Still, being smart about handling capital gains and losses can reduce the drag that taxes can have on your overall portfolio returns.
Doug |
|
Posting from ICLUBcentral world headquarters in the Harvard Square's historic College House, Cambridge, MA
 |
|
|
Patrick Landers
|
| 03/08/2007 8:26 AM |
|
If your club sells a stock held for less than 1 year, what is the tax rate? (Some members are in the 38% tax bracket, while others are in the 15%) Thanks
Pat Landers |
|
|
|
|
Doug Gerlach
Cambridge, MA
http://www.iclub.com/
President, ICLUBcentral
|
| 03/08/2007 9:38 AM |
|
Posted By Patrick Landers on 03/08/2007 8:26 AM
If your club sells a stock held for less than 1 year, what is the tax rate? (Some members are in the 38% tax bracket, while others are in the 15%) Thanks
First, an investment partnership doesn't pay taxes directly -- the individual partners are responsible for reporting (and paying appropriate taxes on) their share of the partnership's gains, losses, income, and expenses. The year-end Allocation of Income and Expenses function takes care of distributing the appropriate amounts to members so that each partner can report his or her share to the IRS and state on his or her tax returns.
In your case, then, if your club sells a stock at a gain that was held for less than one year, the club will distribute short-term capital gains to its members, and each member will report a portion of that gain and then pay taxes at the appropriate rate. So members in the 38% bracket will pay 38% on those gains, while those in the 15% bracket will pay 5% on the gains. (Unless, of course, there are losses that offset the gains.)
It's always a good idea for clubs to strive to be tax neutral -- consider selling a stock or two at year-end to generate a tax loss that will offset the gains that have been registered through the year, so that the net taxable impact of the club is close to zero.
Doug
|
|
Posting from ICLUBcentral world headquarters in the Harvard Square's historic College House, Cambridge, MA
|
|
|
JAMES THOMAS
|
| 03/08/2007 10:37 AM |
|
> The real trick in minimizing the impact of taxes on your investment portfolio, then, is to strive to be tax-neutral, with losses offsetting gains (or the most of the gains) each year. <
> One final rule of thumb about managing capital gains -- there's an old saying on Wall Street that "you'll never get rich selling for a tax loss." Still, being smart about handling capital gains and losses can reduce the drag that taxes can have on your overall portfolio returns. <
You could have just as easily suggested that clubs strive (even plan) to realize gains every year to offset their losses. If you realize a gain on stock A and realize an equal loss on stock B you will indeed have no net capital gain taxes (because you have no net gain). However, I don't see how you can say you've reduced the "tax drag" on your overall return. Certainly you'll pay no taxes if you never realize any gains, but for most clubs it will be appropriate to realize the gains (or losses) on most of their stocks eventually. I just don't see how offsetting realized losses with reaized gains (being tax neutral every year) does anything to reduce the "tax drag" on your unrealized gains (the ony gains you've got left ... the only gains that are producing your return!).
Now, if you want to sell a stock because it's no longer a good fit in your portfolio ... and you happen to be selling it at a loss ... then it's certainly appropriate to evaluate how to most effectively utilize that loss within the context of your tax situation that year. It may well be that the best alternative is to have a realized capital gain in the same tax year so you can offset it with the loss. But minimizing your taxes by arranging to have zero net capital gain does nothing to help the overall performance of your portfolio (zero gain = zero return).
A loss is a loss and I just don't understand why you'd think you've improved your overall after-tax return by arranging to have zero net gain each year. If I'm missing something here, please do explain it to me!
-Jim Thomas |
|
|
|
|
Peter Upton
|
| 03/22/2007 11:26 AM |
|
Is this classroom session still in progress? Has it been moved somewhere else that I haven't found?
It may take 10 days to build a better portfolio, but it seems to take a lot longer to read about it. 
Peter Upton |
|
|
|
|
Victor Smith
|
| 03/29/2007 12:00 PM |
|
Though not a regular on this page I have been printing out the pages of "Build a Better Portfolio in 10 Days" and using them as educational material in our investment club for the newest members. I find that as membership changes over the years the newer ones are intimidated somewhat and remain silent during our meetings. The above lessons have been very useful to bring them up to speed.
Now the question: After Day 7 was posted it has been a long time trying to find days 8, 9, or 10! How can we obtain a copy online of those days? After all, for a 10-day portfolio we're a little behind the times.
Victor Smith (Surreywood Investment Club, Virginia)
|
|
|
|
|
|
| Note: You must be a StockCentral subscriber and logged in to post messages. |
|
|
|
ActiveForums 3.7
|
|