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#1
10-04-2007, 04:09 PM
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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. 
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#4
10-04-2007, 07:01 PM
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Re: Any way to lock in gains w/o paying short term rates?
[ QUOTE ]
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.
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#5
10-04-2007, 07:03 PM
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Re: Any way to lock in gains w/o paying short term rates?
[ QUOTE ]
Put a stop-loss order at $150 - (ST tax amount - LT tax amount) ? [/ QUOTE ] Hmmm... I don't know if I'd want to bother with that, but it's an interesting idea. Thanks.
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#7
10-05-2007, 01:41 AM
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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.
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#8
10-05-2007, 04:53 AM
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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.
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#9
10-05-2007, 08:31 AM
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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.
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#10
10-05-2007, 11:24 AM
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Re: Any way to lock in gains w/o paying short term rates?
[ QUOTE ]
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. [/ QUOTE ] 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.
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