Take It Easy When Selling For A Tax Loss

The techniques of investments fill volumes. Here is a capsule review of some of the more widely used methods, starting with year-end tax selling.

The tax selling idea, of course, is to "take" a paper loss by selling and then use it to offset capital gains taken earlier in the year. Or, conversely, you can take gains to offset earlier losses. Either way it's a tax saver. But either way it can also be a considerable abuse of assets. "It's usually foolish to tear into your portfolio for tax reasons alone," says a Wall Street adviser, "but many people do." So plan ahead before you make a year-end sale.

Let's say that you want to take a tax loss, but you're uncertain about what to do with the money from the sale. One option is to wait out the market. Say that you have realized £20,000 or more. You might go temporarily into UK. Treasury bills. Or perhaps you'll buy short-term commercial paper (corporate notes).

Or take a reverse tack. Sometimes people know where to invest the money from a tax sale, but forget to plan for short-term cash needs - such as taxes. Perhaps you have used the total proceeds of your tax sale to buy a quality stock. You could get caught in a bind next April 15, assuming you still owe a big tax bill. This gets sticky if you have sold off your weak stocks for losses and have to sell a quality issue to pay Internal Revenue - especially if the quality stock happens to be low at the time. Holding back some cash from the tax-loss sale to put into Treasury bills or other short-term investments might be a smart pre-April tax ploy to keep in mind.

Some investors also get tripped up by the liberal carry-over rule. It lets you take a tax loss of any size, even if it can't be used currently - and carry it over indefinitely until it's used up. "It's too much of a lure for some people," says an old pro. "They dig too deeply into worthwhile stocks, hoping to come up with losses." This, he adds, is the height of getting carried away by tax motivations.

Excesses aside, though, you can rack up some profits with year-end tax sales. Given the proper time, here's what you can do: You can make a loss sale by December 31 to offset capital gains. You use the loss to offset up to £1,000 of ordinary income, and then carry the rest forward into future tax years. In the "reverse" offset, you can take paper profits by, say, December 23 (to adhere to a new five-day trading rule), and offset them against losses taken earlier in the year.

The reverse offset has lately become more popular. And note: When selling for a gain, you can buy back the same stock the same day if you want to - and not worry about the 31-day wash-sale rule that erases the tax deduction if you act in the meantime.

You can maintain your original position in a stock when making a loss sale if you do a bit of juggling.

One way is to "double up" in November - that is, buy a like number of shares of the same stock then wait 31 days (to clear the strict wash-sale rule), and sell to take the loss before the end of the year.

Or, of course, you can take the loss by December 31, then wait 31 days to buy back. Doubling up before year's end is the surer method; people who resolve to wait the required time and buy back usually get itchy and end up buying something else, often not as good as the original stock.

A third popular method of juggling - promoted by many brokers - is to switch into a similar stock in the same industry, using a list of "paired" stocks furnished by the broker. Some pros, though, caution against getting needlessly locked into a single industry.

If you work it right, you can freeze a profit - or loss - and postpone the tax result until the following year. If you want to fix your paper profit in a stock but avoid paying the capital gains tax next April, you simply sell short (sell shares borrowed from a broker), and in January deliver your original shares in payment. The gain on the late-year short sale becomes next year's income.

Caution: There is a possible drawback in freezing your present level of profit. If the stock nosedives, your result is fine - but if it zooms, you miss out.

The pros point out that stocks that decline throughout the year may, by and large, be in even deeper depression in early December. So you might wisely plan on selling earlier in November - and beat the doldrums in prices caused by late-rush tax-sellers.


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Making An Entry With The Bond Funds

The bond market is an arena where big-money borrowers and lenders gather, and traders play for multi-million-pound scores in minuscule decimal points. It's an arcane, elite sort of game where £100,000 goes a very short way - it will buy a newcomer one round-lot seat in the bleachers - and the little guy, perhaps for his own good, is usually turned away at the gate.

There is a way, however, for him to get in - by pooling with other mini-investors and buying into one or another of the not-so-new but certainly newly popular bond funds or trusts. Here he can enjoy many of the benefits the big investors have, principally a steady return (7 /2% is not uncommon these days) with far fewer... see: Making An Entry With The Bond Funds