Tax Guru – Ker$tetter Letter

From a client:

Subject: Stocks’ GAINS 2010

Hi Kerry (&Sherry):

 

It’s that time of the year where our Stock Broker calls and says SELL and save on taxes. 

 

Per Broker, Net gains (all Long Term) in 2010 was +/-  $45K (with 15% tax). 

Losses +/-  $15K.

 

I typically pay this matter no mind.  Plus I do not feel right when someone suggests “you better sell”.

WHATCHATHINK???

My Reply:

I’m feeling a bit of deja vu here, because I think we have had this exact scenario pop up in previous years, possibly with the same stockbroker who clearly appears to be more interested in making his personal sales quotas and commissions than in doing what is best for you.

My advice is still the same as it has been for all of the previous years.  Selling just for tax losses is not a wise move.  Sales and purchases should be based on the probable investment potential for the stocks.  If they appear to be heading down, by all means dump them ASAP.  However, if they are doing well and have good upside potential, hold onto them.

If he advises selling off stocks at a loss that you want in your portfolio, you need to be aware of the IRS’s Wash Sale Rule.  If you repurchase those shares or similar ones within 30 days of the sale that showed a loss, IRS will not allow you to actually deduct that loss on your tax return.  You will have to add the loss from the first sale to the cost basis of the replacement shares.  Stockbrokers eager for their commissions will conveniently forget to tell you about that twist to the plan and it will be up to me to break the news to you when I prepare your tax return.

As you know, long term capital gains are taxed at the lowest rate available in the tax system; so having a net positive LTCG isn’t necessarily a bad spot to be in.  For 2010, we actually have those gains taxed at zero and 15% by IRS; so it’s not going to cost you a ton to show a net LTCG on your 2010 Schedule D; definitely not enough to warrant selling off stocks that you would prefer to hold onto.

That’s my two cents worth.  I hope it helps.

Kerry

From Tax Info