Short-Term Capital Gains Tax

Anyone who pays short-run capital gains tax this year is either really lucky or really dumb.


Melpomene

In this life, since ignorance is bliss, anyone who is really dumb is by definition really lucky.

Mercutio.Mont

Or saw that the housing crash would lead to a stock market crash.

Which I would classify as "fairly smart."

Dave

There was a third alternative ("in a really high tax bracket") until Obama decided he wasn't going to repeal the 2001 cuts to the two top tax brackets next year. Before that, some people were more than ready to take their lumps this month rather than next.

scott

The way I see it, I won't have to pay capital gains taxes for years.

iGNORANT

I obviously fit into the dumb category. Please explain.

Matt

Or went short.....

Jason Valendy

For those of us who do not know what this means, could someone explain the Short-Term Capital Gains Tax and why we are lucky or dumb?

John

Or exercised and sold options early in the year, and has not sold any other stock since then.

Matt B

Lucky = you managed to make a short-term gain in 2008 even though the S&P500 is down 40% YTD, either by getting out before the market tanked or managing to make some gains amidst the downturn.

Dumb = You managed to make some money amidst the downturn but by selling now, you are paying higher taxes than if you held on to the investment for the long term, which would have more than likely reaped you even greater gains as the stock market eventually goes back up, as it always does.

Do I have this right? Figuring out the reasoning for "dumb" took a few minutes, and it feels very shaky.

Kurt

Quoting wikipedia for "capital gains tax":
"A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property."

Lucky would be making money on stocks or real estate in this economy. Not sure about the dumb.

MikeM

I think the "dumb" comes from the fact that any gains you made can be offset by cashing out all your loses for tax write-offs. Think about it, anybody with capital gains in some assets should dump their other assets at a loss, write those off their taxes, and avoid the capital gains taxes. Unless, of course, you're "really lucky" and all your assets performed.

Hillary

another option for dumb: you didn't use the downturn to (a) reassess your portfolio and (b) sell the stuff you wanted to get rid of anyway at a loss to either offset this year's gains or bank against future years. but there's still time.

C Neal

I don't understand the "dumb." It's entirely possible for someone to have made short-term capital gains by selling short, or by investing in some inferior-good firm whose fortunes improved because of the downturn. In either of those cases, it wouldn't make sense to try to hold onto those investments for the long term (unless you're especially pessimistic about the economy).

Not that I'm paying for short-term capital gains myself - and I doubt that I'll have to worry about what the long-term capital gains rate will be for a good long while.

Ben

If you did have a taxable gain this year, then you could easily sell and repurchase nearly any other holding that's at a loss and avoid the taxes less of the transactional costs. Alternately, if you are taking a gain on something that's down 40% like everything else, you've likely been holding it for a really long time and this is not a good time to sell it.

chris

can you write off long term cap losses against short term gains?

Brian

If I remember correctly, there are two options you can choose, either First In First Out (FIFO) or Last In First Out (LIFO), if you sell a partial amount of a holding in your portfolio. If this is true then it is possible to pay a short-term capital gains tax when you don't have to which would qualify as dumb. Here is an example: Bob uses dollar cost averaging to put $50 a month into stock xyz. Before the 40% market drop he was buying xyz at $10 a share. Now that the market has gone down 40%, Bob is now buying xyz at $5 a share. For this example let's say the Bob now has to sell some shares of xyz for some reason and the price of xyz rose to $7 today. If Bob decides to use LIFO then he WILL pay the short term capital gains tax on the sell because he is selling the shares of xyz he bought for $5 but if Bob uses FIFO then he avoids the short term capital gains tax because he is selling the shares he bought for $10.

Again assuming I remember correctly.

Read more...

chris

found the answer here, if anyone is curious.

http://invest-faq.com/articles/tax-cap-gains-rates.html

Nate C.

Posts like this are what Twitter is for.

Nate C.

And maybe the OP is trying to say that if you've managed to make gains (not necessarily lucky due to short sales counted as short-term capital gains), you should close some long positions that are at a deep loss to offset the tax. Then you can buy the long positions back at a lower price and have essentially the same exposure as you did before, without paying much, if any, short term gains tax.

I think this all assumes you're trading on a large, or at least a diverse profile.

luca

On the short term I am nearly even but I have some long term capital gain and I was wondering if the same advice apply. They will be taxed at 15%. Is it better if I offset them with some long term losses?
I was thinking about selling until I get about $3000 losses which it seems (from the link in the post above) that I can deduct from my income. is that true? that even long term losses can be deducted from the income? if so, do you think mine is a sound strategy?