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There are many stock trading tax secrets that are promoted to investors as ways to avoid or eliminate the payment of taxes on profits. There are no such things. Gains and profits made on a stock transaction are subject to taxation, whether in the form of capital gains or dividends.
There are however, ways to realize certain tax advantages from your stock trading and either delay or lessen the impact of taxes on your profits. These tips are general in nature and should only be followed upon the advice of your tax accountant or financial professional who knows the specifics of your financial situation.
Avoid Short-Term Gains
For most investors, the motivation behind investing in a stock is the ability to reap profits what the stock begins trading at a price that is higher than what is what purchased for. This creates a tax issue in the form of short-term capital gains, which can be taxed at a rate of up to 35 percent.
Short-term capital gains are profits made when a stock is sold at a higher price than what it was purchased for inside 1 year. Avoiding short-term gains by holding a stock for a longer period than 1 year will change the tax from a short-term to long-term capital gains tax, which is up to 15 percent.
Advantages
- Lower capital gains tax percentage, based on your tax bracket.
- Saves you money.
Disadvantages
- You are not assured that a longer holding period will result in a gain.
- You still have to pay capital gains taxes on the profit when the stock is sold.
Passive Losses from Limited Partnerships
A limited partnership investment may involve real estate (such as apartment buildings and commercial developments), oil and gas exploration and movie productions. The rents or royalties from these enterprises produce revenue that is distributed to the partners as income.
Your involvement as an investor is passive in that you do not make management decisions or run the day-to-day operation of the business. This is important because for many of these investments, particularly in the early years, there are more losses than gains that are distributed. A passive loss can be used to offset the taxes on a passive gain and under current rules, can be used up to 5-years after the loss occurs until it is used up.
Advantages
- Investing in an investment limited partnership can provide you with an offset against future income.
- Passive losses received in a given year can be carried forward until used up to 5-years.
Disadvantages
- Passive losses can only be used to offset passive gains, not regular or portfolio income.
- There is no guarantee of any future passive gains.
These secrets are methods that have been used by tax savvy investors and do produce results in terms of reducing the taxable basis of the investor’s holdings. As with any investment related information or advice, you should seek additional information as to the applicability of any recommended strategy.
Your financial and tax situation may be different that what has been described and only a qualified tax professional or financial professional can determine what is appropriate for you.
