Taxes and Investing

by Jay Pestrichelli on July 10th, 2012

Yesterday we heard the president’s plan for the partial extension of the Bush-Era tax breaks. Essentially he said he’d like to leave taxes as is for 98% of Americans making less than $250,000 a year as well as the majority of small businesses. On the other hand, Mitt Romney has proposed tax cuts for all earners.

Here’s table from the Wall Street Journal this morning that outlines the two candidates’ positions:
This morning we discussed this topic on Fox Business and the bottom line was that investors will adjust. For those of you that have read our book Buy and Hedge, you know that taxes are an important part of our methodology. Immutable Law #5 states that “Only After Tax Returns Matter” and that means investors need to be smart about how their activity creates taxable events.

So as a reminder, here’s the main points to remember when it comes to taxes:
1. Harvest losses as short-term events and gains as long-term when you can. For Example, hedges that lose money should be done in a way that they could offset gains you may have on other positions.
2. For more active strategies, use tax deferred accounts and for long-term positions use taxable accounts. For example, ROTHs and Traditional IRAs can grow without the drag of taxes due to short term gains vs. a normal margin or cash account.
3. Be selective about the vehicles you use by account type. For example: you may want to consider futures options due their favorable tax treatment over stocks or ETFs when creating portfolio hedges.


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