When to Cash Out on a Commodity Trade

You do not have to cash out a commodity trade the moment it is executed. In fact, the majority of commodity traders hold funds in an account for an extended period of time. This enables them to continue trading, but it serves a greater purpose. By holding the funds in an account instead of continually cashing out, you can find some tax benefits through deferring the income. Then, you can select a time to cash out when your capital gains and capital losses will be more even.

How to Cash Out a Commodity Trade

To cash out a trade, you simply need to give the order to your adviser. When you deal in commodities trades, it is important to keep in mind you are rarely actually going to have any contact with the item you are trading. The exception would be if you are actually a farmer or oil refiner on the front end or a purchaser on the back end. Most participants are simply speculators or hedgers, though, and these participants do not touch the commodity. When you make a successful trade, you will have the cash in your account awaiting your order to cash out.

Capital Gains Taxes

Cashing out any security, whether it is a stock or a commodities account, will result in income to you. Specifically, this is considered a sale of a good that has appreciated in value, so you will have to pay capital gains tax. You will pay this tax in the year you cashed out. As long as the funds remain in your account, though, you can defer the taxes, even if you profited on the sale of a commodity. You did not personally take any income. Similar to a real estate 1030 exchange, you are simply swapping the profit on one purchase for interest in another trade.

Capital Depreciation Write-Offs

Holding capital gains in your account for some time allows you to defer taxes until you have a capital gains depreciation. For example, you may lose a significant amount of money next year in a real estate deal or another investment gone bad. This is a write-off, and the amount you lost may begin to offset the earnings you made in a previous commodity trade. The goal is to net a zero profit. Most investors will eventually have a year when they lose money, so you can truly benefit from this situation by cashing out your other profits.

Choosing a Tax Strategy

When you think about your investment profits, you have to plan for taxes and not just bask in the glory of a good deal. The wisest investment professionals always have a tax strategy on the offset. They anticipate some good trades and some bad trades, and they make these trades at opportune times for tax deferrals and benefits. There is nothing illegal about tax planning; the key rule, though, is you have to pay taxes when you take an income off a trade. As long as you follow that rule, there is a lot of flexibility in terms of deferring payments.

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