Giving Uncle Sam His Dues

The IRS wants your club's capital gains. Here's how to lessen your tax liability.

If you’re in an investment club, there’s more to November 26 than Thanksgiving and turkey dinner. For many investors the date marks the opening of tax selling season. Between November 27 and December 27, in fact, many investment dubs sell stock or mutual funds that have posted losses to offset some of the capital gains other holdings have made.

Patricia Boyd, a partner with the New York CPA firm Kahn, Boyd and Levychin and a member of the CMG investment club, says companies that pay dividends are obligated to determine which shareholders are eligible by a certain record date-often toward the end of the year. That affords an investment club enough time to hold a stock until a November record date in order to qualify for the capital gains declared by the company. Afterwards, stockholders are free to sell and lock in any profit they’ve made.

There is a downside. If your club sells a stock too early, it may not be able to qualify for the dividends, warns Boyd. Also, by waiting until November to sell, you run the risk of seeing the stock depreciate in value. “There’s always the chance that if you paid $25 four years ago for a stock, it might be up as high as $58 in April and then swoon to $43 a share in November,” she adds.

And don’t jump headlong into selling every position in your investment club portfolio, cautions Walter L. Clark, a broker with the Baltimore office of Gruntal & Co. Clark, who acts as a financial advisor for several investment clubs in Maryland and Virginia, says, “Tax selling is a strategy for more sophisticated clubs that have done exceptionally well; they have several realized gains in their portfolio.” It’s time to give a stock the once-over only if it has gained 30% from your initial investment.

Say you still like a stock, but want to net the fruits of a sizable increase. If your club is still enthusiastic about a stock’s long-term prospects, you can always consider selling it and then buying it back after 31 days. For instance, says Clark, “if you sell a stock on November 20 and you buy it back on December 22, you may be able to repurchase the stock at or below the price you paid for it because others are liquidating.”

Historically, the stock market starts to recover at the beginning of the new year, which Wall Street calls the “January effect.” “Investors start bottom fishing, buying back stocks at a lower price,” adds Clark. “They look for undervalued stocks that were oversold for tax selling.” The downside to that strategy, though, is obvious: you’ll pay a total of four brokerage commissions to buy, sell, buy and later sell, instead of the usual two.

Boyd says that dubs should keep on top of their investments to know a good time to sell. Most young clubs hold their stocks too long or sell too quickly. The new capital gains rules say that investors have to hold appreciated property

Pages: 1 2
ACROSS THE WEB