You know the old saying about death and taxes.
No, you can’t avoid paying your share, but in terms of your trades and investments, you can certainly make a few tax moves to help you minimize the bite—or at least help you avoid paying too much (or worse—running afoul of the tax rules).
Wall Street is taking the measure of the new Administration, and sees, among its first moves, a boost in fiscal stimulus that is likely to goose consumer spending, bump corporate profits,. Check these six items off your to-do list before New Year’s Eve. Review your budget. The end of the year is a good opportunity to scrutinize your budget. Because everything changed in March, though, you shouldn’t use recent numbers to set guidelines for 2021. Katz encourages you to look back at your goals and spending from early 2020.
But don’t wait too long to tie up those loose ends. After the calendar flips to 2021, it may be too late, and the last thing you want is to get stuck dealing with past issues that you thought were resolved.
For traders and investors, there are a number of unexpected items that may show up when you file your taxes for the previous year. That includes things like wash sales, constructive sales, and substitute payments. And if you’ve shorted a stock, are long a stock in a margin account, or trade broad-based index options, futures, or other so-called Section 1256 contracts, there may be special tax considerations.
Here are a few year-end tax tips as you wrap up your investment activities for 2020.
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If you sell a stock at a loss and then repurchase the same stock 30 calendar days before or after the loss-sale date, your trade is considered a wash sale. The wash sale rule is Uncle Sam’s way of telling you that if you plan on maintaining a stock position, you can’t nab tax deductions as your stock moves down in price. Although the wash sale concept is fairly easy to understand, it’s important to be aware of how this 61-day window may affect trades at the end of one year and the start of the next.
10 Ways to Turn One Sale into Many Your sales process at the point of sale can often be overlooked because you have achieved the sale itself. But if you want to turn that sale in to many more, it. Once you sell a product or service to a customer, the last thing a retailer wants is to get that item back. However, your job is to delight the customers, and returns and refunds are a reality of retailing. Here’s how to turn those inconvenient returns into exchanges and avoid refunds by implementing these simple customer service skills. Turn that first sale into the next sale book.
Let’s suppose, come December, that you’ve decided to sell stock at a loss for tax-deduction purposes. If you close your position, say mid-December 2020, and repurchase the stock in January 2021 before the end of the 30-day window, you’ve technically made a wash sale. This means you can’t deduct your capital loss for that stock from your 2020 taxes after all, as you’ve carried the trade over to 2021. Note that wash sale rules also apply to “short” positions that are closed at a loss (see more below).
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Suppose you’re long a stock whose price had risen, but you hear forecasts indicating that it may be in for a downturn. Despite the negative news, you believe your stock is worth keeping for the long run, so you decide to hedge your investment by opening a short position against your long position. You’re now long and short the same stock.
This is called “shorting against the box.” It essentially means that you have locked in, or “boxed in,” your current profit by initiating a new short position against the stock you’re simultaneously holding. If you own, say, 100 shares of a stock that had risen from $100 to $150, you have an unrealized profit of $50 per share. If you short 100 shares of the same stock while simultaneously holding it, you then create a situation in which any price movement from that point on, up or down, will no longer yield profit or loss. You’ve essentially hedged your entire position.
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This has some tax implications. Because neither the long nor the short position has been closed—both are still active—your 1099-B won’t show a gain. But technically, you do have a gain: the one you locked in. And that gain is considered a constructive sale.
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Although the IRS instructs brokers not to report constructive sales on client 1099s, according to the Taxpayer Relief Act of 1997, you’re required to disclose and pay taxes on capital gains from that boxed position.
Constructive sales can also be triggered by certain options strategies, accounts held among different family members, and various other scenarios. Read the IRS Publication 550 to get a more comprehensive understanding of the rules concerning “constructive ownership of stock.” You may be required to report certain gains that have been excluded from your 1099-B.