End of Year Checklist #2 - Planning your Capital Gains Tax Bill

by Wayne Ferbert on December 3rd, 2013

It is now December and this is your chance to plan your tax bill for April 2014! More than likely, if you already have some positions you closed in 2013, they were Gains! This year has been straight up on top of a great up year in 2012. So, if you exited any positions, you likely exited at a profit. Uncle Sam will want his take in April!
So, you can start planning and look for opportunities to harvest any losses to help to offset that tax bill. Alternatively, if you didn’t exit any positions but you were hedging all year, then you have some short-term losses on the hedges that you want to make sure you can use – if it makes sense to use them and not carry them forward to 2014.
Either way, step #1 is to run a realized gain/loss report for YTD 2013 so you know where you already stand on the tax liability front. If you have exited a position in 2013, then you have the tax liability ahead of you!
Step #2, calculate your long-term and short-term capital gain/loss situation. Are you in a total net gain or net loss situation?
Step #3 is to run the unrealized gain/loss report for YTD 2013 so you know which current positions are candidates for harvesting to manage your tax situation.
Step #4 is to identify the candidates among the positions you currently hold with unrealized gains/losses.
The most logical candidates if you are trying to offset realized gains:
  1. Look for any hedges with losses that are unrealized and roll them forward to future dates or to alternative strike prices. This will enable you to move that loss on that hedge in to 2013.
  2. Look for any stock or ETFs with an unrealized loss that have a robust options market on the underlying stock/ETF. Then, close the position to take the loss – but roll yourself in to a deep ITM call (or sell a deep ITM put) to represent the very similar holding to the ETF/stock. Then, after 30 days go by, you can roll back out of the long call (or short put) and buy the ETF or stock back. The 30 days makes sure you avoid the wash sale rules!
The most logical candidate if you are trying to offset realized losses:
  1. You probably have many positions with gains in 2013. If you need to harvest a gain, then, close the position to take the gain – then purchase it back at your leisure. The wash sale rule of 30 days does not apply to gains – so you will be required to take the gain even if you buy the stock back immediately.
  2. If you have not re-balanced in a long time (more than 6 months, eg), you could just look for natural selling opportunities among your positions that are now over-weight because they have out-performed. Trim those winners and that creates a realized gain!
It is important to make sure you manage your tax bill and avoid having to write an un-necessary tax bill to Uncle Sam next year – especially given the flexibility you have to use options to manage your tax bill.

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