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.

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.

That doesn't seem too difficult. Why all the confusion?

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.

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".