Any way to lock in gains w/o paying short term rates?
 

6 months ago, I bought 100 shares of X at $100 per share. Now they are worth $150 per share and I want to sell. If I sell now, I pay short term tax rates of around 30%. If I wait 6 more months, the long term tax rate will be 15%.

What I am trying to figure out is if there is anyway to lock in the gain now so that I could avoid paying short term rates. Obvious techniques would seem to be selling short or buying puts, but it appears these cause the resulting sale of the underlying stock to be treated as short term sales, even if I wait the full year. (Google "constructive sales" or look at IRS pub 550.)

Anyway, just looking for confirmation that I basically need to just wait 6 more months and hope the stock doesn't crater in the meantime.

One semi-loophole I was imagining is that I could short sell something that I think is strongly correlated with the stock I hold. Any thoughts on that? Any other ideas? Thanks.

Re: Any way to lock in gains w/o paying short term rates?
 

Spider man, spider man ...

Don't mind me, I have always wanted to do that [img]/images/graemlins/cool.gif[/img]

Re: Any way to lock in gains w/o paying short term rates?
 

Put a stop-loss order before $150 - (ST tax amount - LT tax amount) ?

Re: Any way to lock in gains w/o paying short term rates?
 

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Spider man, spider man ...

Don't mind me, I have always wanted to do that [img]/images/graemlins/cool.gif[/img]

[/ QUOTE ]

No worries, thanks for the bump. Doesn't seem to be interesting anybody.

Re: Any way to lock in gains w/o paying short term rates?
 

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Put a stop-loss order at $150 - (ST tax amount - LT tax amount) ?

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Hmmm... I don't know if I'd want to bother with that, but it's an interesting idea. Thanks.

Re: Any way to lock in gains w/o paying short term rates?
 

its very interesting spider, but I cant seem to come up with any solutions

Re: Any way to lock in gains w/o paying short term rates?
 

Anyway you slice it, it's a judgement call.

You could sell the stock, now, and possibly find another winner that, in six months could make you a helleva lot more that the money you would've saved in taxes. Of course, you could also end up with a loser that ends up costing you even more.

Re: Any way to lock in gains w/o paying short term rates?
 

That related industry thing is a common way to avoid wash sales. Especially with ETF's, if it's a large part of an index (hint, Apple). Another way is deep in the money covered calls, although I'll let you look that up to see if it's a constructive sale. Example: Sell a March 08 covered call with a strike of 100. It would probably bring you about $55 or $60. The stock would have to drop below $100 for you to lose money. If it starts getting near, you can calculate whether it's cheaper to bail out and pay the tax or hope it stays afloat. Two things - obviously you need the stock to trade options, and there is a danger your short call will be exercised early and you will trigger the gain. Still no worse than just selling right now.

Re: Any way to lock in gains w/o paying short term rates?
 

buy a put, sell a call of the same strike price.

This is the same thing as a short sale, w/o interest or dividends. margin wise, you may need to tell your broker what you are doing.

edit - you don't have to exercise the stock against it. You could even open another acct with your broker if you are worried about it.

Re: Any way to lock in gains w/o paying short term rates?
 

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Another way is deep in the money covered calls, although I'll let you look that up to see if it's a constructive sale.

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As best I can tell, anything I would do relating to short selling or buying/selling a put/call would trigger the constructive sale thing, if the underlying stock has been held less than a year at the time I do anything.

Which makes sense if the basic point of tax law is to only give the long term rates to investments that were at risk for over a year.

Re: Any way to lock in gains w/o paying short term rates?
 

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That related industry thing is a common way to avoid wash sales. Especially with ETF's, if it's a large part of an index (hint, Apple).

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Thanks, that's part of what I was trying to find out here: what is the standard practice? I have no intent of doing anything unethical here. At the same time, if there are accepted/legal/ethical ways to minimize taxes, I'd like to know my options of course.

So I probably should have used my actual stock(s) in question here in the first place, which are the emerging market ETFs EEM & VWO. I'm realizing now that if I only had EEM, I could buy some puts on VWO and problem solved.

As it is I will probably look around for another ETF that seems close enough, though I think those are the two major ones, EEM especially.

Re: Any way to lock in gains w/o paying short term rates?
 

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That related industry thing is a common way to avoid wash sales. Especially with ETF's, if it's a large part of an index (hint, Apple).

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Thanks, that's part of what I was trying to find out here: what is the standard practice? I have no intent of doing anything unethical here. At the same time, if there are accepted/legal/ethical ways to minimize taxes, I'd like to know my options of course.

So I probably should have used my actual stock(s) in question here in the first place, which are the emerging market ETFs EEM & VWO. I'm realizing now that if I only had EEM, I could buy some puts on VWO and problem solved.

As it is I will probably look around for another ETF that seems close enough, though I think those are the two major ones, EEM especially.

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those are ETFs...MSCI does emerging market indexes (in addition to EAFE i believe) that i'm sure are insanely highly correlated to your ETFs so why not do your strategy (whatever you choose) on the MSCI indexes.

Barron

Re: Any way to lock in gains w/o paying short term rates?
 

EEM & VWO are both based on MSCI's Emerging Markets index, although I think their actual samples differ quite a bit (VWO uses a much larger sample, or vice versa, I can't remember). I'm sure I can find another ETF that is closely correlated, I just haven't looked into it yet.

Re: Any way to lock in gains w/o paying short term rates?
 

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EEM & VWO are both based on MSCI's Emerging Markets index, although I think their actual samples differ quite a bit (VWO uses a much larger sample, or vice versa, I can't remember). I'm sure I can find another ETF that is closely correlated, I just haven't looked into it yet.

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well if you can't find another highly correlated ETF, just short the MSCI EMI, right? (or buy OTM puts or whatever)... i mean the ETF is technically a different security than the MSCI EMI right?

anyways, hope this all works out.

Barron

Re: Any way to lock in gains w/o paying short term rates?
 

According to this article buying put options would not trigger a constructive sale because of the one way nature of the hedge ... only if the hedge disallows both gains and lost (ie. future and forwards, direct short).

BTW what tax software do you use if any?

Re: Any way to lock in gains w/o paying short term rates?
 

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According to this article buying put options would not trigger a constructive sale because of the one way nature of the hedge ... only if the hedge disallows both gains and lost (ie. future and forwards, direct short).

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Huh, I wonder if that article is out of date... I can't see any date on it...

Anyway, I was mostly looking at IRS pub 550 around pages 57-58. That was the basis for what I mentioned earlier, that if the underlying security is short term when you buy the put, it locks the short term rates on the stock, even if you hold the underlying stock itself for over a year.