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Financial Planning / Tax Strategies


Subject:  Re: short term loss & long term gain? Date:  4/25/1997  1:23 PM
Author:  TMFTaxes Number:  5 of 127636

On Wed, 23 Apr 97 22:21:51 -0600, cmovic wrote:

I've got a BTD portfolio that is due to be reinvested.

I know I'm supposed to keep all the stocks for 366 days

so they are taxed as long term capital gains. My question

is should I sell the losers early to create short term losses? It seems logical but since taxes often defy

logic I'm curious if anyone knows a problem with this plan.



Thanks for the question, Vic. The answer really depends upon your personal tax situation. In general, if you are in a "normal" tax bracket GREATER than 28%, you generally want to keep your winners long term, and your losers short term. Why? Well lets think about this for a few minutes.

If you are in a "normal" tax bracket GREATER than the 28% bracket, the Long Term Capital Gains (LTCG) rates are a MAXIMUM of 28%. So by holding winners long term, you can save on a few tax dollars. And if you are in the 39.6% "normal" bracket, this tax savings may be very significant. So it is pretty easy to see why you would want to hold your winners for long term.

But now lets look at you losers. If you are like many investors, some of your gains may be short term. While we at the Fool advocate longer term holds, you nevertheless may have gains from trades that you made that were not held for over a year. One example could be a "short" that you invested in, which by definition is a more short term investment. So lets say that you have some short term gains to deal with.

Remember that you short term gains will be taxed at your "normal" tax rate. So, again, if your "normal" tax rate is greater than 28%, the taxes on these short term gains could be pretty severe. So, what is a Fool to do??

Lets stop for a second and look at how the Schedule D (Capital Gains and Losses) works. In order to compute your "net" gain, you must first offset your short term gains with your short term losses. Then you must offset your long term gains with your long term losses. Then you combine both of the results in order to arrive at your "net" long term or short term gain or loss.

But because of this "combination" of short term gains or losses, many investors (again in a "normal" bracket greater than 28%)want to match up short term winners with short term losers. This saves tax dollars. And is the reason that many investors want to take their losers as short term.

Now, then, if your "normal" tax rate is 28% or less, most of this planning goes right out the window. Why? Because all of your gains and losses are taxed at or below a 28% rate. So a LTCG versus a STCG is really meaningless. If effect, they are all treated the same for tax purposes. That being the case, if your "normal" rate is 28% or less, stock sales tax planning becomes a little easier to deal with. Gains, losses, whatever, are all basically treated the same.

So if your "normal" rate is 28% or less, taking your losses short, and your gains long is a little less meaningful. But if your "normal" rate is greater than 28%, and if there are other circumstances involved, the strategy that you not could be a REAL tax saver.

TMF Taxes
Roy Lewis
A Fool
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