Tax Guide: Tips for Investors

Tip for investors (non-traders)

See our newest planning guide, with tips and strategies for 1998!

Consider changes
in what you own.

Invest in small business. Did you purchase any shares of qualified small business stock which, to the extent you realize capital gain and hold the stock for more than five years, may permit you to exclude 50% of the gain when the shares are sold or exchanged?

Review this checklist before the end of the year:

Can capital gains be offset with capital losses?
- Use trade date for gains and losses.
- Net capital loss of $3,000 can be applied against ordinary income.
Are bond premiums/discounts properly amortized/accreted?
Should you sell "short-against-the-box" to realize gains in 1996 but recognize gains in some future year?
Avoid wash sale rules (that is, selling a security at a loss and purchasing the same security within thirty days).
Consider bond swapping (that is, replacing bonds that will result in capital losses with other bonds that do not fall within the wash sale rules).
Defer income by purchasing U.S. Treasury bills and selected CDs that do not mature until 1997.

Consider donating the long-term portion of futures. If you invest in futures, bear in mind a court decision which permitted a taxpayer to give away the long-term portion of his futures contract without recognizing the gain.

Review U.S. Series EE Bond rules. Effective for bonds issued after May 1, 1995, the U.S. Treasury changed the payment rates and terms for U.S. Series EE Bonds. Among other changes, interest is credited at six-month intervals. (See Chapter 6.)

Determine whether you are an investor or a trader. Most individuals who buy and sell securities for their own accounts are usually considered investors. Their main purpose is to realize and maximize in-vestment income, that is, interest, dividends, and the gain associated with the appreciation of the underlying security. An investor is al-lowed a deduction for his or her expenses as an itemized deduction subject to the 2% floor limitation and the 3% phaseout. (A trader is not subject to these limitations.) Conversely, a trader will not be as interested in the interest or dividend yield as much as in the profit from the short-term swings in the market. A trader or someone in the trade or business will deduct expenses against his or her profit.

Tips for business owners -->