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Author: troyman Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Strategies to reduce capital gains tax exposure? Date: 10/20/1999 4:31 PM
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I'm looking at about $88k in short term capital gains for 1999 (a tax liability of $35K) and I am searching for some innovative ways to “push” these gains out to 2000. I have provided some of my own ponderings below and would welcome any discussion on these strategies or, hopefully, even better strategies for reducing my 1999 capital gains tax exposure.

Examples: (of my own devices which, admittedly, may or may not hold water)

1. Take the cash that I have now and buy stocks in a relatively large number (20) companies. Sell all the losers in late December. Hold all the winners until 2000 or later. I'd basically be tracking the market, overall, which is o.k. by me. (assuming that I am no better or worse at picking winners and losers than the monkey!)

Potential problem with this approach: Given that my capital base is only $150K, this doesn't give me enough leverage to significantly make a dent in the $88k in capital gains. I doubt that half of my stocks in a large diversified portfolio would gain say 50k (up 66% from 75K) and the other half lose 50k (down 66% from 75k) between now and the end of the year. Buying on margin could help, but still wouldn't get me there.

2. Buy a fairly large number of both puts and calls (straddles) for a group of given stocks. For the sake of argument, I am assuming that I would break even on these investments (minus transaction costs). I would then take any losses in the December of 1999 and the gains in January of 2000. But, after reading the Fool's articles on constructive sales, I learned that I could only deduct the losses to “the extent that the loss exceeds the unrecognized gain in the other positions.” So, I have to add a twist. I would overcome this problem by not buying puts and calls for the same stocks (i.e straddles). Rather I would buy puts for companies for which I don't buy calls and vice versa. The goal being to buy enough puts and calls such that “statistically” speaking, I would break even overall (again, minus transaction costs.)

Potential problems with this approach: 1) Are the transaction costs justified? (since it is more expensive to trade options) My guess is that the transaction costs would be justified. 2)And even if some stock prices went up and others went down, would the fact that the premium is reduced as time passes prevent one from ”statistically” breaking even(even without considering transaction costs. In other words, if I could buy calls on 1000 companies and puts on 1000 companies without any transaction costs 45 days before expiration and then sold them 15 days before expiration, should I still expect to lose money, since I could no longer expect to get the premiums that I had originally paid?

Thoughts?
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