Sure, we all know the capital gains tax rules for income tax purposes are quite complicated. But it’s important to know that if you use them to your advantage, you can significantly cut your income tax bill.
How? Well you can do that by selling some of your stock losers to offset any capital gains. Sounds simple enough, but is it? It does get a bit tricky when you have both short-term and long-term gains and losses. But we’ll try our best to make it as straightforward as possible.
First let’s take a look at the differences between Long-Term Vs. Short-Term:
The first step you need to take is to separate your short-term capital gains and losses from your long-term gains and losses. The reason for this is long-term gains are taxed at the lower capital gains rates you hear so much about, while your short-term gains are taxed at your regular rate (which can run as high as 35% depending on your tax bracket).
Short-term investment assets are those that are held for one year or less (not less than one year, as you commonly hear). And long-term investments are those you’ve held for more than one year.
For purposes of meeting the more-than-one-year rule, your income tax holding period is calculated as begin on the day after you acquire the investment asset. The holding period ends on the day you sell. In effect, you don’t count the day you buy. But you do count the day you sell.
For example, say you buy 100 shares of Cisco (CSCO: 15.94*, +0.61, +3.97%) on Nov. 15, 2007. Your holding period starts on the 16th. If the shares go up and you want to take advantage of the lower tax rate on long-term capital gains, you can’t sell before Nov. 16, 2008 — exactly a year and a day after your holding period began.
The Netting Rules
Your next step is to add together all your gains and losses. First, you net your short-term gains and losses — that is, you calculate each individual gain or loss by subtracting the purchase price of the securities (including commissions) from the sales proceeds net of commission. Then just sum everything up. You’ll come up with an overall net short-term gain or loss figure. Next, you net your long-term gains and losses in the same fashion. You’ll end up with either a net long-term loss or a net long-term gain.
Now you need to net your short- and long-term figures to come up with a final amount. Now this is where it gets really complicated. And if you have both short and long-term gains and losses, deciphering what it all means is enough to make your head feel like you just took a couple of spins on the Lightning Loops roller coaster at Great America.
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