Cost Basis - Capital Gains Question

[Jeb-NY]

This is the last year of high taxable income. Next year will be my first full year of retirement and the plan is to juggle funds in away to stay in the 10-15% bracket.

Up till now I have been in the acquire mode and have never sold any of my mutual fund shares in my taxable account. I have done all my juggling in my 401K and Roth.

I have two funds that I bought during the tech bubble and rode out the dip buying all the way. When they started back up I stopped buying and let them grow back, figuring I had enough exposure in tech.

Both funds have recovered enough that on average, are a little ahead. Certainly not big winners. One can hope they will be some day.

As I understand it (and I may not), I can pick and choose which shares I sell. If I only sell shares that I bought for more than their current value I can harvest about $9K in capital losses. I should have more than that in capital gains this year, so I could use it all.

The question: Is this allowed and how much of a pain am I making for myself doing my taxes this year and in the future?

I do my own taxes. All my purchases and reinvestments are all in Quicken so I can pin point the shares fairly easy. Not sure how hard it will be to get the broker (TD Ameritrade) to sell the blocks I want.

Jeb

 

[Martha]

We do this to manage our capital gains. Our broker won't let us specify the shares in online trades, we have to do it by phone. Be sure to get confirmation showing what shares were sold. Find out what your broker requires to specify the shares sold before you sell or you will be SOL.

Otherwise, if you can't identify the shares sold the IRS assumes first in first out. http://www.irs.gov/faqs/faq-kw184.html

 

[LOL!]

The IRS has an easy to understand publication on all this:

http://www.irs.gov/publications/p564/index.html

To sell those specific shares, you have to do a "versus purchase" sale with your broker or the mutual fund company. As Martha wrote, call them up and ask them what you asked us.

 

[LOL!]

Oh, TDAmeritrade used to do "versus purchase", but last time I tried, they said, "Keep your own records."

And it is a pain to keep track of everything. Especially when your computer containing your Quicken files has a disk crash.

After doing it the PIA way for many years, I now just sell all shares in an account and I'm done with it.

 

[kramer]

You can check out this thread for a little more info:

http://socialize.morningstar.com/NewSocialize/Asp/FullConv.asp?forumId=F100000015&convSeqNumber=6054

If you are a lifelong accumulator, using Specific ID for your shares is critical, and it will save you many 10's of thousands of dollars.

And the biggest mistake many investors make is to use the average cost basis method -- once you start with this method you can never change.

I think I added a little more detail in this thread, too:

http://www.raddr-pages.com/forums/viewtopic.php?t=2808

Also, there is no reason to hurry. There is no reason to sell a fund or shares on any particular day, we should not be market timers. Make sure you understand everything before acting.

Kramer

 

[kramer]

Also, there is no reason to delay taking all losses. Take them when you have them. It is better to have excess losses -- do not try to match them to your gains. It is a free lunch -- losses can be deducted at ordinary income tax rates -- you pay many years later in a lower retirement tax bracket at cap gains rates.

I have paid net negative taxes on capital gains for many years due to the fact that I captured losses, even though I have a large taxable portfolio, and even though the funds on which I formerly took losses are way, way above what I paid for them now. So I get a 35% (fed + state) annual deduction on my $3000 carry forward loss -- so I save over $1000 in taxes per year PLUS I pay no capital gains taxes on any gains (which are rare, anyway, since I own mostly index funds).

This seeming desire to match losses to gains is Kramer's Second Most Common Mistake that investors make. Actually, there are others that I won't elaborate on, and I am making this up as I go along. . .

Kramer

 

[LOL!]

I agree with kramer that harvesting tax losses is important. Indeed, I think there are two important times to book losses:
1. On any investment, before the one-year of ownership is up, look to see if there is a loss. If so, book it for the short-term loss and do not wait for it to pass the one-year mark and become a long-term loss.

2. Also look late in the year in November and December to plan to book your long-term losses.

Booking losses has been shown to be important for best portfolio performance (I'll ltry to find the article in the Journal of Financial Planning. By making it a habit, a must-do, an automatic thing, one overcomes one of the big bugaboos of behavioral finance: loss aversion.

Besides where else can you gain 20%, 25% or even more instantly on your loss? And then be taxed only 15% on the subsequent gain.

 

[LOL!]

To emphasize: You want your harvested losses to offset ordinary income and short term gains and not your long-term gains. Losses are more valuable when used to offset highly taxed income. Losses are less valuable when used to offset long-term capital gains.

Here is an article to read:
http://www.fpanet.org/journal/articles/2006_Issues/jfp0206-art9.cfm

 

[Jeb-NY]

Thanks for all the good advise. I will call TD Ameritrade and see what they say.

Do I have any options if they refuse to do the paper work for Specific ID? Not sure threatening to move all my funds will be enough since they only have about $250K of my funds and I plan to use Vanguard for the bulk of my funds when I roll them out of my companies plan.

Jeb

 

[youbet]

1. On any investment, before the one-year of ownership is up, look to see if there is a loss. If so, book it for the short-term loss and do not wait for it to pass the one-year mark and become a long-term loss.

What happens if you only have long-term losses? I'll have zero losses this year and only long term losses carrying over from prior years. Can these long term losses be used to offset short term gains and $3K of ordinary income?

 

[d]

yes, you can carry losses foward to offset ordinary income

 

[JohnEyles]

yes, you can carry losses foward to offset ordinary income

Let me get this straight - any capital-loss carryover counts as a short-term loss
on the following year's tax return ?

But I assume you can't elect to carryover a loss, only that it happens automatically
if you exceed $3000 ? Except that by taking a long-term loss in a year where you
already have $3000 of losses, you are effectively converting it to a short-term loss ?

 

[eridanus]

Let me get this straight - any capital-loss carryover counts as a short-term loss
on the following year's tax return ?

No, capital losses carryover the same: short-term or long-term.

http://www.irs.gov/publications/p550/ch04.html#d0e14615

 

[youbet]

No, capital losses carryover the same: short-term or long-term.

http://www.irs.gov/publications/p550/ch04.html#d0e14615

Thanks for the link. That helped. It says:

When you carry over a loss, it remains long term or short term. A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains.

I also looked at last year's worksheet for Sched D Line 21. That shows short term and long term capital loss carryovers being calculated separately.

I have only long term capital loss carryovers. It looks like they first apply against long term capital gains and any left after that against short term capital gains and any left after that, up to $3K, as an offset to ordinary income.

 

[Nords]

Do I have any options if they refuse to do the paper work for Specific ID?

They probably won't reply to your request, but just keep a record of your & their correspondence. The IRS guidelines are fairly clear but seem to be rarely enforced. Your efforts are what would count, not the broker's.

Keep in mind that once you start selling specific shares of a stock/fund, all of that stock/fund's holdings have to be sold in that manner no matter how long it takes. It's a good strategy the first year you choose to do so, but in the remaining year those multi-page Schedules D are a PITA. If someone is doing your taxes for you they'll need to be aware of what funds have sold specific shares in the past, and they may charge you more for the extra data entry.

 

[Jeb-NY]

Well I did it, took 3 phone transfers and about 2 hours on the phone but TD Ameritrade let me sell my Mutual Funds using Specific ID on to maximize my Capital Losses. Knowing the proper terminology (thanks all) helped a lot and when I got to the proper person they had a way to do it. They had to place multiple sells, they started doing one and a time then decided there was room on the form to do 3 at a time. Each transaction records the purchase dates. I will have a stack of paper when I get all the sell orders.

It was made much easier on my end because it was all in Quicken. Using the built in tools told me what blocks to sell to max out my capital losses.

As far as reporting it on taxes. Someone or somewhere I saw that all I had to do was put down various for the date and make one entry. If that isn't true I will have a lot of paper work (around 60 blocks). I do my own taxes, so I guess I'll have to charge myself for the extra effort.

Thanks all for the help.

Jeb

 

[Nords]

Well I did it, took 3 phone transfers and about 2 hours on the phone but TD Ameritrade let me sell my Mutual Funds using Specific ID on to maximize my Capital Losses. Knowing the proper terminology (thanks all) helped a lot and when I got to the proper person they had a way to do it. They had to place multiple sells, they started doing one and a time then decided there was room on the form to do 3 at a time. Each transaction records the purchase dates. I will have a stack of paper when I get all the sell orders.
As far as reporting it on taxes. Someone or somewhere I saw that all I had to do was put down various for the date and make one entry. If that isn't true I will have a lot of paper work (around 60 blocks). I do my own taxes, so I guess I'll have to charge myself for the extra effort.

Eh, the fun is just beginning. If the 1099 matches your calculations then you can probably get away with a single "various" and the cap gains/losses.

But if that 1099 isn't correct then the IRS computers will trap the return right away.