Considerations
Minimizing your taxes is essential to maximizing your investment returns. Unless you are trading in a tax deferred account (IRA, 401K, etc), every trade you make has a real tax consequence. With a simple understanding of the tax laws and the real-time cost basis reporting GainsTracker provides, you can make more profitable trading decisions by minimizing how much you will have to share with the TaxMan. Click on the links below to view detailed information for smart tax planning:
Wait for an investment to qualify as a long-term holding
Would you take an instant 20% return on an investment? No need to answer...then you should always avoid selling stock that qualifies as a short-term investment (stocks owned for 1 year or less). By waiting for the investment to qualify as a long-term holding (stocks owned for more than one year), you can save yourself up to 20 percentage points, which is over 50% in savings. Why? Because the tax rate on a long-term investment is a flat 15% (5% for investors who are in the 15% tax bracket), while the tax rate on a short-term investment can be as high as 35% (depending on your AGI - see What does the TaxMan really get? for more information on this topic). The difference between the tax rate on a long-term holding and a short-term holding and a short-term holding is 20 percentage points. That is over a 100% difference in the taxes owed to the TaxMan. The simple rule of thumb is to avoid long-term losses. In this case, it is sometimes better to sell your losers before they turn long-term. This will allow you to offset any short-term gains with losses. This rule is only true if you have both long-term and short-term capital gains.
Knowing your stock's cost basis is essential to making tax-smart trading decisions. Use GainsTracker's Unrealized view to determine which stocks to sell. To minimize the taxes paid and maximize your after tax returns, sell your highest-cost shares first. Always look to offset prior gain by selling stocks that will allow you to take a loss. Remember to make sure to match long-term gains (trading activity) with long-term losses and short-term gains with short-term losses. Then, if you have short term losses left over, you can subtract them from any long-term gains left over. Final note, up to $30,000 in capital losses can be deducted from your ordinary income - the rest can be carried forward. Please be aware of wash sales A wash sale is trading activity in which shares of a security are sold at a loss and a substantially identical security is purchased within 30 days. The subsequent purchase could occur before or after the security is sold, creating a 61-day window that must be monitored to identify wash sales.. The IRS will not let you recognize a loss, if you buy the stock back within 30 days. The good news is that GainsTracker also takes care of wash sales calculations too. See What are Wash Sales? for more information.
Dividends received in non-tax deferred accounts are no longer taxed at your ordinary income tax rate. All dividend payments are taxed at 15% no matter how long you owned the stock paying the dividend. Under the tax law, they are technically considered added to any net capital gain for purposes of applying the 15% rate of both qualified dividends and the amount of net capital gains computed by subtracting net capital losses from capital gains. However, if you have a net capital loss instead of a net capital gain from the latter computation, it will not reduce your entitlement to the 15% rate being applied to any of your qualified dividends. Basically, this is good news, although it does add another complicated wrinkle to your final tax computations!