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Author: mpell Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121334  
Subject: Tax Preparation Date: 12/22/1998 2:53 PM
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3 questions:

1)My accountant is not into stocks (keeps all his $$ in t-bills) and now that I'm investing and trading on my own he's not as helpful as I'd like.
How does one find a good accountant! Word of mouth or is there some sort of credential one should look for to assure the person has really good training?

2)Also. I've made some $ this year, and lots of trades (my first year trading and I wanted to let myself experiment a bit so traded more than I will probably in the years to come...) I'm really busy, not familiar with Quicken, etc., and I've made enough profit that I'm wondering about hiring someone to tally up my trades, dividends, etc. Would I ask an accountant to do that or would I try to find someone with bookkeeping background who wants a few hours of extra work? I know these are basic questionss but I've never been in this position before of reporting cap gains and losses... I'm spending a lot of time on learning about the markets and prefer not to have to also spend lots of time doing the accounting as it's not my forte and I want to make sure it's done right. I think it would cost me more in time lost to do it myself than to have someone else handle it, at least this first time...

3) If I buy 100 shares of stock for, say, $1/a share and it doubles, I have... $200 worth. If I sell 50 shares, that means I've taken out only my original investment and what's left is my $100 profit, correct? How does the IRS look at this? Do I have to report the sale? Do they consider the $100 from the 50 shares sold as profit or my initial investment capital??

Any help much appreciated.
mpell
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Author: vargaj Three stars, 500 posts 10+ Year Anniversary! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7477 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 3:49 PM
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The way the IRS looks at it: You sold 50 s at $2 for $100. Each of those shares cost $1. So you made a profit of$1 on each share for a total gain of $50. So you pay capital gains on $50. You also have in your account 50 more shares that cost $50 which you hold and sel at a later date. if they fall below $1/s and you sell then you would have a capital loss.

Joe Varga

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7478 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 3:57 PM
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1)My accountant is not into stocks (keeps all his $$ in t-bills) and now that I'm investing and trading on my own he's not as helpful as I'd like.
How does one find a good accountant! Word of mouth or is there some sort of credential one should look for to assure the person has really good training?


I'm also in the same boat of looking for someone to do my taxes this year. I intend to rely heavily on word of mouth and ask some of my friends who they use or recommend. I also intend to interview these folks to make sure that they will mesh with my style and that I feel comfortable working with them. I'd suggest you do something similar.

2)Also. I've made some $ this year, and lots of trades (my first year trading and I wanted to let myself experiment a bit so traded more than I will probably in the years to come...) I'm really busy, not familiar with Quicken, etc., and I've made enough profit that I'm wondering about hiring someone to tally up my trades, dividends, etc. Would I ask an accountant to do that or would I try to find someone with bookkeeping background who wants a few hours of extra work? I know these are basic questionss but I've never been in this position before of reporting cap gains and losses... I'm spending a lot of time on learning about the markets and prefer not to have to also spend lots of time doing the accounting as it's not my forte and I want to make sure it's done right. I think it would cost me more in time lost to do it myself than to have someone else handle it, at least this first time...

I see no value to hiring someone else to tally it all up. Your stocks [if you hold them in your own name] or your broker [if you hold them in a brokerage account in street name] will send you statements with the dividends tallied for you already, and they will also send that information to the IRS. As far as the trades, you should have the confirmation information from the broker for when you sold. I would gather the whole thing and give it to the accountant to include on your taxes. He will need to report each sale separately anyhow, so it seems like duplicate work to ask [and pay!] someone else to do this. Since you'll have to dig up the records to provide to the tax preparer anyhow, it will be taken care of then.

3) If I buy 100 shares of stock for, say, $1/a share and it doubles, I have... $200 worth. If I sell 50 shares, that means I've taken out only my original investment and what's left is my $100 profit, correct? How does the IRS look at this? Do I have to report the sale? Do they consider the $100 from the 50 shares sold as profit or my initial investment capital??

In your scenario, you will have to report that you paid $50 for those 50 shares, and that you made $100 when you sold them. The IRS treats them as individual lots, and you don't get to claim that you are just taking your initial investment out. You will have to pay capital gains on that $50 profit. That's one of the reasons you need to keep good records about all your purchases so that you can report the accurate basis when you finally sell. You may, however, feel like you got your initial investment back and that what's left invested is really profit, but the IRS won't see it like that, so your reporting will be as I've outlined above.

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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7480 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 4:30 PM
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mpell has three interesting questions:

"How does one find a good accountant! Word of mouth or is there some sort of credential one should look for to assure the person has really good training?"

Word of mouth has always worked for me. I can't believe that any tax accountant doesn't understand fairly basic investment accounting. If yours doesn't he flunks. My law firm had a reasonable recommendation... and they knew someone who understood my sort of business.

If you are becoming a day-trader, and want to consider trying to make your trading into a business, you probably need a specialist. I'm not sure how you'll find one, although http://www.fairmark.com/ has some discussion under the heading "Traders and Investors."


"I've made some $ this year, and lots of trades (my first year trading and I wanted to let myself experiment a bit so traded more than I will probably in the years to come...) I'm really busy, not familiar with Quicken, etc., and I've made enough profit that I'm wondering about hiring someone to tally up my trades, dividends, etc. Would I ask an accountant to do that or would I try to find someone with bookkeeping background who wants a few hours of extra work?"

Are you sure you made money? How many trades was it? So you went crazy, did you? You did save the broker's confirmation sheets, right?

Seriously, it shouldn't be hard for nayone who knows how to prepare Form 1040 Schedule D to add up your trades. And since every trade will need to be reported, whether this year or possibly (if you're holding shares over the end of the year) in a future year, you'll need the info, and you'll need to keep it for future years if you're keeping any shares for the longer term.

You must preserve these records... it's not your brokerage's job to remember, seven years from now, what you paid for a share of stock which you're finally selling it. True, they'll try to help, if they can... but it's your taxes, and your problem.


"If I buy 100 shares of stock for, say, $1/a share and it doubles, I have... $200 worth. If I sell 50 shares, that means I've taken out only my original investment and what's left is my $100 profit, correct? How does the IRS look at this? Do I have to report the sale? Do they consider the $100 from the 50 shares sold as profit or my initial investment capital??"

Nope. You may think of it that way (I do, too), but Uncle Sammy, as Roy usually refers to it, doesn't.

When you sell those fifty shares, you are selling stock which cost you (has a cost basis of) $50 for $100, and therefore making a capital gain of $50... this ignores commissions, which should be added in to the cost, and subtracted from the sale, but this is the general idea. So you report a $50 gain on your Schedule D this year, and continue to remember that the other fifty shares that you still have also has a cost basis of $50, for the time when you sell them. When you finally sell those, you report the gain from that sale based on the original cost of the shares. You pretty much have to report every sale, and account for every share, whether you're making or losing money.

If you bought and sold the same stock several times, there are some additional rules which can apply. Normally, if you bought at multiple times, you sell "FIFO" (first in - first out), unless you take particular action to indicate which shares you are selling. And if you sell for a loss, and buy back within a short time, that's a "Wash Sale" and also gets special treatment.

Alternatively, there are totally different rules if you have the business of being a trader, and use "mark to market" accounting. As I suggested up above, you'll need expert advice for that.


Happy counting... and may you continue to make "$"!

Dick Smith





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Author: mpell Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7482 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 5:22 PM
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Thanks to all for the very clear replies!
to Dick Smith:
"Are you sure you made money?" Yup. I mean I have about 25% more money in my trading account than when I started investing in Feb. so, I figure I made $$$...!!!

"How many trades was it? So you went crazy, did you?" Not crazy exactly... but I tend to learn only when real $$ is on the line, so I wanted to give myself permission to try different things and see what felt right to me (taking small profits, cashing out positions when news on a company's practices made me doubt their management, even a few day trades, cashing out losing positions to put the money to work elsewhere where I anticipated better return... several times I'd lost $ because I was afraid of taking profits and paying taxes. I decided taking profits is sometimes a fine activity when a stock seems to have peaked and the market very volatile...

All in all it was a great experience, and now I'm turning more towards long term holds on the few stocks I really like (they tend to be companies whose management seems most solid), especially in my taxable account. But I don't want to ever be afraid to sell when I feel fundamentals on a stock have changed, or when the market in general is so shaky that I don't feel comfortable holding all my positions...

"You did save the broker's confirmation sheets, right?"
Yes, I did save every one and will keep them safe!

thanks again,
mpell




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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7504 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 7:45 PM
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[[1)My accountant is not into stocks (keeps all his $$ in t-bills) and now that I'm
investing and trading on my own he's not as helpful as I'd like.
How does one find a good accountant! Word of mouth or is there some sort of
credential one should look for to assure the person has really good training? ]]

You can read my thoughts on this issue in the Taxes FAQ area. But it looks like a number of others have provided information to consider also.

[[ 2)Also. I've made some $ this year, and lots of trades (my first year trading and
I wanted to let myself experiment a bit so traded more than I will probably in the
years to come...) I'm really busy, not familiar with Quicken, etc., and I've made
enough profit that I'm wondering about hiring someone to tally up my trades,
dividends, etc. Would I ask an accountant to do that or would I try to find
someone with bookkeeping background who wants a few hours of extra work?]]

You would most likely want to find a bookkeeper or family friend to help you out there. You accountant, or his staff, will generally charge you a good amount of money to recap your transactions. At least that is MY practice in MY office. But once you select a tax pro, you can always ask the question.

[[ 3) If I buy 100 shares of stock for, say, $1/a share and it doubles, I have...
$200 worth. If I sell 50 shares, that means I've taken out only my original
investment and what's left is my $100 profit, correct?]]

Nope...not correct at all. When you say the stock "doubles", I can only assume that you mean that the stock has increased in value....from $1/share to $2/share. I also assume that you are NOT talking about a stock split or stock dividend.

Your basis in your original purchase is $1/share for each and every share that you own. Which means that if the stock now has a FMV of $2/share, and you sell 50 shares, your gross sales price (ignoring commissions) would amount to $100, your cost basis would amount to $50, and your gain would also be $50. And you would still own 50 shares at a cost basis of $1/share.

[[How does the IRS look at
this?]]

Exactly the way that I explain it above.

[[ Do I have to report the sale?]]

Absolutely!!!!

[[ Do they consider the $100 from the 50
shares sold as profit or my initial investment capital??]]

Neither...as explained above.

While I fully understand that you don't want to spend a bunch of your time dealing with tax issues, your questions indicate that you are a PRIME candidate for reading The Motley Fool Investment Tax Guide. It was written for beginning investors. It's not huge, or time consuming, but will give you a number of the very, very BASIC tax issues that EVERY investor should know. You might want to check it out.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7505 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 7:48 PM
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[[ I'm also in the same boat of looking for someone to do my taxes this year. I
intend to rely heavily on word of mouth and ask some of my friends who they
use or recommend. I also intend to interview these folks to make sure that they
will mesh with my style and that I feel comfortable working with them. I'd
suggest you do something similar. ]]

That is basically what I have suggested in my post on finding a tax pro in the Taxes FAQ area. So I would certainly agree with your process.

TMF Taxes
Roy

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Author: mpell Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7509 of 121334
Subject: Re: Tax Preparation Date: 12/22/1998 9:09 PM
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TMFTaxes wrote:
"While I fully understand that you don't want to spend a bunch of your time dealing with tax issues, your questions indicate that you are a PRIME candidate for reading The Motley Fool Investment Tax Guide"

Thanks for that and the rest of your reply --I will read the Guide. It's time I get those basics learned... time to do my homework!
mpell



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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7540 of 121334
Subject: Re: Tax Preparation Date: 12/24/1998 9:36 AM
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[[Thanks for that and the rest of your reply --I will read the Guide. It's time I get
those basics learned... time to do my homework!]]

Good Deal!!

I think that you'll enjoy it, and I know that you'll learn a lot about taxes and investing.

TMF Taxes
Roy

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