Using Tax Lots to Minimize Your Tax Burden

Tax lots are tables that organize your investments into groups based on costs per share. This allows you to keep track of how your shares are taxed and customize your investment strategy accordingly. In other words, you will be able to customize your investment strategy that reduces your tax burden as much as possible. There are several tried-and-true strategies that will allow you to minimize your tax burden, you just have to keep the careful eye on your tax lots every step of the way.

Understanding Tax Lots

Tax-funds are tables that contain financial information on all your investments. Your shares are split into groups (or lots) based on the initial costs of the share. Each lot gets it's own row. The information about each group is split into several columns. There are separate columns for purchase dates, sale dates, cost per share when purchased, amount of shares purchased and current value of per share. When the shares are sold, the selling price replaces the current value. Organizing the shares in this way gives you a better perspective on whether your investments gain or lose money.

Avoid Short-Term Capital Gains

As with other sources of income, you have to pay taxes on any profit you earn when your shares are sold. This profit is known as capital gain. The capital gains are taxed differently, depending on the length of time between the purchase date and the sale date. If the shares were sold less then a year after they were purchased, your profits are taxed as short-term gains. If your shares are sold a year or more after they were purchased, they are taxed as long-term gains.

The short-term gains are taxed at the end of every tax year. Long-term gains, on the other hand, are taxed on whatever year they are sold. For example, if you bought shares and sold them ten years later, you will be taxed ten years later. Furthermore, the long-term capital gains are taxed at a smaller rate than short-term capital gains. This is why you should avoid short-term gains as much as possible. You can do that by looking up your shares in the tax lot and checking the purchase date.

Balance Capital Gains With Capital Losses

If you sell your stocks at the loss, you can get a tax credit for the difference. This means that if the value of your losses is equal to the value of your gains, you won't have to pay any capital gains taxes. This balance is difficult to pull off, but that doesn't mean you shouldn't try. Your best strategy is to try to coordinate your gains and losses. If you plan to sell shares that increased in value, look through your tax lots and see if any of your shares have lost value since you purchased them and sell them off. Even if your capital losses aren't enough to completely offset your capital gains, you would still wind up reducing your tax burden.

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