Understanding Capital Gains Calculations for the
Aggressive Investor and Trader
The typical agressive investor and trader in the
public securities arena will have numerous transactions
during the course of a year. The number of these
transactions can easily number into the hundreds and even
the thousands in any given year. With the explosion in
self-controlled investing now due to Internet processes,
this situation will become more of a problem for the
aggressive investor. Calculating the capital gains and
losses, and wash sales etc., is a nightmare without the
proper software. Keeping a running tally of these gains and
losses throughout the year is even more difficult. Typically
transactions in stocks for the aggresive investor and trader
is not a one time purchase with the sale of the full lot of
shares long term, but multiple purchases of the same stock
at different prices, with partial and combined sales of
various lots of shares bought at different times. The
following excerpt from one online provider of a solution to
this problem gives some details as to why it is such an
important matter for the modern investor.
How to calculate gains and losses for Schedule
D
GainsKeepers portfolio management and tracking tool
allows you to enter your positions and monitor them for
market movement just like any other portfolio tracker.
Thats where the similarities end. Unlike other
trackers available today, GainsKeeper automatically adjusts
your portfolio for trading activity, corporate actions and
wash sales. Backed by an experienced team of securities and
taxation specialists, GainsKeeper uses the power of the
Internet to deliver state of the art data analysis, allowing
you to trade in a tax savvy way every day.
It's that time of year again. The annual battle
between investors and the Schedule D.
Can GainsKeeper help? GainsKeeper protects
investors from having to manually apply complicated tax laws
and cost basis adjustments to their holdings and gain/loss
reports, while providing accurate records in the event of an
IRS audit. Don't pay your accountant or tax preparer to
figure it out; GainsKeeper will do it a fraction of the
price. With GainsKeeper's service, the Schedule D is
completed with the click of a mouse.
What makes capital gain/loss calculations so
complicated? Read on . . .
"How do I figure gains and losses on Schedule D" was
the most frequently asked question during USA Today's Tax
Hotline last March. The questions were directed to Members
of the American Institute of Certified Public Accountants.
Unfortunately, the answer is not as easy as it seems.
The basic principles:
To calculate gains or
losses, subtract the cost to purchase a security from the
proceeds of selling it.
Gains from investments
held longer than one year are taxed at the more favorable
capital gains rate (no higher than 20%). Investments held
less than a year are treated as income and taxed at the
personal income tax rate (as high as 39.6%).
If you have a net loss
position for the year, the IRS will allow you to write-off a
loss of up to $3,000 against your income. All other losses
must be carried-forward to future years.
Reason #1: Tax-Lot Matching. Most
brokerage firms do not provide investors with an accurate
summary of gains and losses; it is the responsibility of the
individual investor to track cost basis and calculate their
own gains and losses. Brokers will provide you with a form
1099-B listing all the stock sales you made throughout the
year. But they do not identify which tax-lots you sold, what
your gains or losses were, or whether they were short or
long term. Unless you provide instructions to your broker
identifying specific tax-lots to sell and receive written
confirmation, you must account for stock sales using the
First In First Out (FIFO) method. This means for each sell
order placed, you must match it to the appropriate
tax-lot(s) originally purchased. Further, sells can go
across multiple lots, perhaps resulting in both short and
long term gains and losses. Complications magnify if you
re-invest dividends or if you systematically invest smaller
amounts.
Reason #2: The dreaded Wash Sale Rule. The IRS
implemented the Wash Sale Rule to prevent investors from
generating artificial losses to reduce their taxes. In
short, if an investor sells a security for a loss, and
re-purchases that security (or a substantially identical
security) 30 days before or after the sell date, the loss is
deferred for tax purposes. Investors need to offset the
deferred loss with a wash sale cost adjustment on the newly
acquired tax-lot. YIKES! Again, brokers do not notify
investors when or if they have wash sales. It is up to each
individual investor to scan their trading history, identify
wash sales, and make the appropriate cost basis
adjustments.
Reason #3: Corporate Action activity. A Corporate
Action is essentially any material change to a security,
including name changes, stock splits, spin-offs, and
mergers, to name just a few. In many cases, a corporate
action will result in a new position or a change to the cost
basis of your security. Not surprisingly, it is up to the
investor to make all necessary cost basis adjustments for
each security. With over 8,000 corporate actions annually
that affect a stock's cost basis, the odds are good you will
encounter one sooner or later. Some corporate actions are
manageable: To account for a stock split, investors must
divide the total cost of the initial purchase by the new
share amount to come up with an adjusted cost per share.
Other corporate actions, however, require more laborious
calculations. Mergers can be either; taxable, in which case
you need to realize an 'artificial' sale and re-purchase; or
non-taxable, in which case you need to allocate cost basis
to the new security. Each corporate action type has its own
rules that investors must learn if they are to accurately
complete their Schedule D.
How important is it to accurately file your Schedule
D? The typical answer is "You don't want to overpay your
taxes". But there is another reason for accuracy. According
to Taxes4Less.com, an online tax preparation firm, a
Schedule D increases your chances of being audited. "Because
of the complexity involved in preparing the Schedule D, the
IRS frequently audits taxpayers who include this schedule in
their return, and the resulting amount of additional
assessed taxes, penalties and interest can be very large.
When the IRS targets a taxpayer who filed a Capital Gains
& Losses Schedule D, they typically look at the basis of
assets sold, unreported sales, holding periods, etc.",
states Taxes4Less.com's website.
GainsKeeper is the ONLY automated solution for wash sales
and corporate action adjustments affecting cost basis.
Investors simply enter original buy and sell transactions
into GainsKeeper, and GK will automatically match sell
transactions against appropriate tax-lots, and adjust
positions and cost bases for corporate actions and wash
sales. To make life even easier, GainsKeeper allows
preferred users to input trades via Excel. GK also provides
investors with accurate gain/loss and tax implications of
trades so investors can make smarter trading decisions.
Lastly, the daunting Schedule D can now be completed with
the click of a mouse.
Software Solutions to the
Schedule D Capital Gains Computation
Problem
In addition to the GainsKeeper mentioned in the above
article, most tax preparation software like TurboTax from
will facilitate the capital gains schedule D process. One
other solution that seems to provide an even better running
tally throughout the year is the Fast Scedule D Generator.
A
trial copy of the Fast Schedule D Generator software may be
downloaded by clicking here.
Special Pricing For HIPG
affiliates
Hannaian has negotiated spcial pricing
for HIPG affiliates to buy the Fast Schedule D. Generator.
Please follow these instructions to obtain the special
pricing.
The following are the order instructions for Hannaian
members:
Single Account
Version
Visit http://washsales.com
and navigate to the Ordering page. select either Upgrade for
Registered User $25 or Upgrade for CD Registered User $35
version. In the Special Instruction Text box, type in
'Hannaian member'. ( You will receive the full version of
the program).
Multiple Account
Version
Visit http://softwaydev.bizland.com/fastscheduledgenerator
and navigate to the Ordering page. Select "Single
Workstation Version For Tax Year 2001 and Prior: $99 special
offer". In the Special Instruction Text box, type in
'Hannaian Member".
|