Year end STOCK TRADE Tax Strategy.

**xxyygorich** Sun Nov 19, 2006 1:44 pm

Year end STOCK TRADE Tax Strategy.
This year is very tough for BIRTP holders, especially for the coal stock holders. We suffered a huge loss on JRCC and other coal picks.

Here, I just want to share some stock strategies that I used to claim the stock capital loss in this calendar year.

Some basics about capital loss:
1. You can only claim $3000 a year.
2. The rest loss will be carried over in the future.

Here is an example.
2006 You have capital gain $1000, capital loss $8000, you net loss is $7000.
In 2006, you can only take $3000 loss, $4000 will be carried over.

Situation 1:
In 2007, you have a capital gain $2000, capital loss $1000.
In 2007, you still can take $3000 loss, the rest loss (7000 + 1000 - 2000 - 3000) = $3000 will be carried over to the next year.

Situation 2;
In 2007, you have a capital gain $10000, capital loss $1000.
In 2007, you have $2000 (10000-1000-7000) capital gain in the end.

Sometime, we want to claim capital loss, however, we still want to hold the stock and wait for it turning around. IRS prohits us to claim the loss and hold the stock at the same time by creating wash sale rule.
Say, u sale a stock for a loss, u can not buy it back before or after 30 days, otherwise u can not claim this loss, the loss will add to the cost of the buy.

I just want to talk about the strategies I used to avoid wash sale and realize the loss.

1. Buy double and Sell half after 30 days.
Double the position and sell half after $30 days.
ADV: Avoid wash sale.
CON: U have to use lots of cash, U expose to double loss in the stock down more.

2. Buy a similar stock and sell all ur loser, and buy the loser back after 30 days and sell the replacement.
Example: Sell all JRCC, and buy the corresponding amount ARLP, after 30 days u sell ARLP and add JRCC.
ADV: Avoid wash sale, cash level remains the same.
CON: You have to be careful for the replace pick. It should have the similar background and financial performance. If you pick another loser, u screwed urself.

3. Sell put of a similar stock and sell all ur loser, buy the put of the replacement and buy your loser back after 30 days.
Example: Sell 2 puts of ICO which expires in next a few month, sell 100 JRCC and reverse the transaction after 30 days.
Sell Put: You give the right to others sell u shares at a specific price in the future.
Put loss its value when the stock go up.

ADV: You generate cash. You sell a put, usually it means u can back the stock at a price slightly lower then the current market price.
CON: If your placement is going down, the put is going up. U will pay more to buy it back. However if the sector is all going down, it means u can buy back ur losser with a lower price.

Summary,
The key problem is to find a good replacement stock. You will hope when you hold the replacement, the replacement is going up, and the loser u just sold keeps going down, so that u can buy it back. All this strategies can not avoid the risk that if the whole sector is going down, u will loss from the replacement, and buy back at a more discounted loser.

**yhan** Sun Nov 19, 2006 1:55 pm

This is a good article. But I guess that the best strategy is to get good return, and not to worry too much about tax issue. Remeber, Warren Buffet said: the first rule of investing is "not to lose your money". The 2nd rule is "not to forget the first rule".

**xxyygorich** Sun Nov 19, 2006 2:07 pm

You should vote for me!

I agree with you. As long as you have profit, no matter how high the tax is u still have something left. However, tax is always a factor to affect your return. For example, you sale 1 month earlier than a year to take a short term captial gain at a tax rate 30%, you actually have about 18% protection if you sell ur stock after a year at a long term rate of 15%.

If we take a look of GETI, if we sell it 3 month later, the stock rise about another 10% more and the tax rate will drop half, that's another 25%. Of course, on can argue, what if the stock crashs?

yhan wrote: This is a good article. But I guess that the best strategy is to get good return, and not to worry too much about tax issue. Remeber, Warren Buffet said: the first rule of investing is "not to lose your money". The 2nd rule is "not to forget the first rule".

**yhan** Sun Nov 19, 2006 5:07 pm

I should make myself more clear. If you are looking for a tax-efficient investment, you should go for an index fund, which has much low turn over rate than others. I know a lot of tax rules, and there are a lot of ways to have effective tax for capital gains.

What my point is "Not to loss" is the first priority.