United States: Year End Capital Gain & Loss Stock Planning Strategies

Strategies are available that can help the taxpayer offset capital stock gains and maximize capital losses. The deemed sale election and the wash sale rule are two provisions that may be used to reach these goals.

The wash sale rule has an exception and this aids investors. The repurchase of stocks that were at a loss and sold must be made at least 31 days after the sale (or before) or the tax loss will be disallowed under the wash sale rule. If the investor waits 30 days before repurchasing the security, the stock price might increase so it costs more to get back into that market.

The IRS has offered a way to avoid the wash sales rule. The wash sale rule doesn’t apply if the sale is made from a taxable account and the same investment is purchased within the taxpayer’s IRA or 401(k) plan.

Another stock planning tip is the deemed sale election. This is an election that can be made to treat capital assets held on January 1, 2001 as if they were sold and repurchased at its fair market value. However these assets must be held for five years to apply the deemed sale election. As a result, the future appreciation will only be taxed at 18% rather than the 20%.

Individuals and all pass-through entities qualify for the deemed sale election. The election applies to assets used in a trade or business, securities and real estate.

There are circumstances in which it is better not to make the deemed sale election: prepaying tax is a hinderance, assets will probably not be held until January 1, 2006, potential statutory reduction of capital gain rates, potential for reducing holding period for long-term gains, or a step up in basis at date of death.

The deemed sale election should be utilized when the taxpayer has little to no gain in his/her assets, has realized losses to offset gains, has long-term loss carryovers, or has net operating loss carryovers. Taxpayers with charitable deduction carryovers or who wish to reduce their estate tax by creating a tax liability should also consider this election.

Examples of the types of taxpayer situations to benefit include: individual has realized security losses of $20,000 or more in 2001 or an individual has recently acquired assets (real estate, new business).

Before implementing any of these tax savings tactics, it is prudent to contact a tax professional. The tax professional can evaluate the relevance of these approaches to a particular situation.