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4 Tax Tips For Investors

Lately, we've been getting quite a few inquiries regarding tax harvesting, as well as the effect of transferring assets from one brokerage account to another has on your taxes. We decided to create an infograph for you guys as well as a blog post diving a little bit deeper into the details. Enjoy!

 

 

Long Term Vs. Short Term Gains

In 2014, short term capital gains (where the asset was held less than one year) is taxed just like your ordinary income which ranges from 10% to 39.6%. 

On the other hand, long term capital gains (assets held for longer than a year) can be taxed at 0%, 15%, or 20% for most taxpayers. If your ordinary tax rate lies under 15%, then you could qualify for a  0% tax rate on these gains.

Tax Loss Harvesting

This is where things get interesting. As you all know, the end of the year is coming up, this means that there are a few things you can do to dodge some pesky capital gains taxes.

Tax-Loss Harvesting consists of selling securities at a loss in order to offset a capital gains tax liability (generally done at the end of the year) This will limit the recognition of short-term capital gains, which are taxed a higher rate than long-term capital gains.

The Wash-Set Rule

Now, its not as simple as selling a security at a loss on December 31st and purchasing the identical amount of securities on the 1st of January. This is what the IRS calls the "Wash-Set Rule" and it requires that you wait at least 30 days before repurchasing that set of securities in order for the loss to count against your gains in that fiscal year. You can make another trade with a "a similar asset of high correlation" before the 30 days in order to keep your market exposure constant.

In this scenario, let's say you own securities in Microsoft, and they currently are down from your original purchase price but you're in it for the long run. You can choose to sell the security and "harvest" the loss, but you have to wait 31 days until you can repurchase it again, which may make you miss some gains. But if you wanted to stay in the same sector, you could purchase shares of Apple right afterwards to keep your market exposure in the software/computer sector.

Income Limit

only $3,000 of loss can be used to reduce your taxable income.

Overall, the general rule here is to use this tax benefit if it outweighs the administrative cost of the transactions in question.

One Last Thing: Transferring Assets

You're unhappy with your current brokerage firm. They don't pay attention to your needs, you feel like they don't care about your business because you're not one of the "big players" and their fees are too damn high. You think to yourself - "It's time for a switch.

First of all, don't worry, your taxes will not be affected. How do you get this process started you ask? Well its actually quite simple. You need two things: Transfer forms from your new Brokerage Firm and the current account statement from the old firm. Each firm's process is a little different, but if you want to transfer over to SprinkleBit, all we need is a filled out ACAT form (which can be provided to you upon request).

After all the paperwork is done, its only a matter of time until you are officially done with the old firm and can trade on with your new account.

Or, if you don't have a brokerage account at all, but want to get in on all the action, sign up here.

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At SprinkleBit, founded in 2011, we believe that if you have a dollar, then you have what it takes to be an investor. Sometimes you just need a little extra help to build your confidence. With our virtual simulator and our 24 free SprinkleBit University chapters, you will be able to learn the ins and outs of the market risk-free. Once you're ready to dive into the real thing, the community will be right there with you to help you on your journey. Dive in and start taking control of your financial future. You won't regret it.

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