Not my question- taken from another board (with no responses), but I’d be interested in the answer. Thanks. The question is whether, for tax planning purposes, I should lock in some losses to offset my gains. or, should i pay the lower capital gains rate now for 2008 and wait to lock in my losses during a future tax year? This would assume that capital gains tax rates increase during 2009/2010. Any thoughts?
Depending on the amount of money we are talking here, this is a pretty serious question. I’ll give my input as a very bottom guy who is just starting at an CPA firm. I did taxes for a season at H&R Block likewise. Tax Harvesting - The affluent clients participated in this practice at the AM I worked at. However, a loss is a loss. If you are certain that an investment will not rebound after this economy, then it is a great idea to take the tax loss. If you are not sure, you may miss a run up during the 31 day period where you may not hold the security. The second question about realizing losses now or when capital gains increase. I would think your tax professional (assuming they do not work at say H&R Block) would be able to walk you through this. There may be a time lag when the policy is announced to which you could make a decision then. This is a pretty involved question with your personal situation, the amount of gains/losses that are present, and the monetary impact of a capital gain tax increase.
ditchdigger2CFA Wrote: ------------------------------------------------------- > Depending on the amount of money we are talking > here, this is a pretty serious question. I’ll > give my input as a very bottom guy who is just > starting at an CPA firm. I did taxes for a season > at H&R Block likewise. > > Tax Harvesting - The affluent clients participated > in this practice at the AM I worked at. However, > a loss is a loss. If you are certain that an > investment will not rebound after this economy, > then it is a great idea to take the tax loss. If > you are not sure, you may miss a run up during the > 31 day period where you may not hold the security. An option here is the sell the security and find one with an high R^2 (easier with funds). This way you realize the tax loss and don’t get out of the market. The tax code read that the new security can’t be “substanitally similar”. What this mean I am not sure. They haven’t been too many cases on this setting precedent. > > > The second question about realizing losses now or > when capital gains increase. I would think your > tax professional (assuming they do not work at say > H&R Block) would be able to walk you through this. > There may be a time lag when the policy is > announced to which you could make a decision then. > This is a pretty involved question with your > personal situation, the amount of gains/losses > that are present, and the monetary impact of a > capital gain tax increase. Be careful with this one. President Clinton broke the mold here an made a capital gains increase retroactive. So if you wait until it is announced you may have already missed the boat.
"An option here is the sell the security and find one with an high R^2 (easier with funds). This way you realize the tax loss and don’t get out of the market. The tax code read that the new security can’t be “substantially similar”. What this mean I am not sure. They haven’t been too many cases on this setting precedent. " What this means is convertible bonds, warrants and options on the same security. Last I checked, one could take a loss on a ProShare ETF and then hold a similar Vanguard ETF during the 31 days. That second question is where I’m struggling. I guess you could look at is like a bird in the hand is better than two in the bush.
ditchdigger2CFA Wrote: ------------------------------------------------------- > "An option here is the sell the security and find > one with an high R^2 (easier with funds). This way > you realize the tax loss and don’t get out of the > market. The tax code read that the new security > can’t be “substantially similar”. What this mean I > am not sure. They haven’t been too many cases on > this setting precedent. " > > > What this means is convertible bonds, warrants and > options on the same security. > > Last I checked, one could take a loss on a > ProShare ETF and then hold a similar Vanguard ETF > during the 31 days. This is where it is really dicey. Let’s say it was a S&P 500 ETF and VFINX that you are switching to. Obviously they are different funds, but the underlying investments are really the same. I wouldn’t want to argue that in tax court. The question then becomes how different do they need to be? Who would even make than determination? What if 450 of the underlying securities were the same, but 50 were different? Sounds good to me, but I am not a judge. That is what I mean by no cases to give you any solid ground to make a decision on. > > That second question is where I’m struggling. I > guess you could look at is like a bird in the hand > is better than two in the bush. We have clients that are selling businesses this year that are trying to move the final payments on installment sales into this year so they can avoid potential capital gains tax increases. They are just managing legislative risk.
ThX
kevinh109 gmail. “This is where it is really dicey. Let’s say it was a S&P 500 ETF and VFINX that you are switching to. Obviously they are different funds, but the underlying investments are really the same. I wouldn’t want to argue that in tax court. The question then becomes how different do they need to be? Who would even make than determination? What if 450 of the underlying securities were the same, but 50 were different? Sounds good to me, but I am not a judge. That is what I mean by no cases to give you any solid ground to make a decision on.” It looks like I need some more review in this area. I could have sworn I read that options, warrants, and convertible bonds were the common similar securities. ETFs were quite different among companies and thus suitable as a substitute. We did this a bit at the AM and to my knowledge nothing adverse came out of it. Then again the last thing I ever want to do is go to tax court ;-).
ditchdigger2CFA Wrote: ------------------------------------------------------- > kevinh109 gmail. > > It looks like I need some more review in this > area. I could have sworn I read that options, > warrants, and convertible bonds were the common > similar securities. ETFs were quite different > among companies and thus suitable as a substitute. > We did this a bit at the AM and to my knowledge > nothing adverse came out of it. Then again the > last thing I ever want to do is go to tax court > ;-). I am not saying you are wrong. I am just saying that an ambitious agent could look at a personal return and say you are violating the wash sale rule. In that case if you don’t agree you have a fight on your hands. The area is pretty grey. Our firm has used similar strategies as yours and haven’t had any adverse effects. We do let our clients know of hte risk beforehand though. How is the new job going?
Right now I’m simply reviewing the tax changes for the current year. My official start date is on 1/23, so I have a lot of time on my hands. I ordered that Wall Street Prep program so I can become more affluent with Excel. And I plan on getting in better shape since the Level 1 stress really wore me out. Otherwise I’m still technically not employed until 1/23. A quick question for you. How often does your firm have questionable items like the one above which demands tax court? The partner I’ll be working for has told me that at least a few times a year he’ll need to send his attorney to tax court to handle the interpretation of the tax code. The partner himself does not mind following up on IRS letters, but he said tax court is another ball game that he stays away from.
It will depend highly upon how aggressive each firm/manager gets with his decisions. As you may have already learned, taxes aren’t just “this number goes in this box”. There is significant areas of interpreations and creativity as well as planning (especially on more complex returns). I would say that I have only seen our firm go to tax court 2 or 3 times in the last 4-5 years. So not that often. There is really no upside to it though. You already took the aggressive stance on the return, so if you win nothing changes, but if you lose then the client has more taxes due.