Year-End Tax Considerations


filing-taxesBy Moishe Silver,

It’s the time of the year to review your portfolio to identify any dogs among your investments. These pound puppies and kitties can be worth real money to you, if you take advantage of them. These dogs that you thought at the time you invested in them were golden can be worth tax dollars to you, if you sell them before the end of the year. With stocks it may be to your advantage to take the loss and move on.

This year has been an exceptionally turbulent year. We have had the Euro crash, continuing stalls in the debt reduction here in the USA and various other market moving meltdowns. To say this market was exciting is an understatement. We are now at the end of this jittery year and it is time for you to harvest your capital losses.

Let’s take the following example to explain the concept of “harvesting” a capital loss: Let’s assume that you bought 1,000 shares of Social Media Buzz Corp. for which you paid $5 per share. Here you hit it big and right now, that investment is worth $50,000. You now have a sizeable gain.

Now assume you bought 1,000 shares of UnSocial Media Buzz Corp. at $50 per share. As it turns out they had much stock market buzz but little to no media. The stock tanked and right now, your $50,000 investment is worth less than $5,000. Now you have a sizeable loss. So typically, hope kicks in and a little voice inside your head starts saying UnSocial Media Buzz Corp will surly come back and you will recoup all your losses, don’t sell now!

One practical approach may be to sell both stocks. In that manner your gains would go against your losses saving you from paying taxes on the profit.

At times you can get lucky, and if the price of both companies stays the same for the next month you can even buy back both position s after 30 days and adjust your cost basis accordingly. If you do buy it back before 30 days you will have violated the wash sale rules and your deduction will be disallowed.

Please beware of the wash sale rules, and as always, I strongly suggest that before booking capital gains or capital losses for the 2011 tax year, you consult with your tax adviser. You might also find some help by downloading IRS Publication 550, “Investment Income and Expenses (Section 4 Capital Gains and Losses).” You can find there additional information as well as other IRS Publications.

Too many people take a reactive lax approach to taxes leaving it to their accountants. However, it is those that take a proactive approach and discuss with their accountants different ideas that often pay far less taxes. Ultimately, it’s not what you earn but what you end up keeping after taxes that is important!

Some popular questions regarding your Tax Basis

Uncle Sam gifted me some Fannie Mae shares and instructed me to reinvest all the dividends. I was 13 years old then and have no idea what the value of those shares were when they were gifted to me.

Do I go back in history and check the price of the shares on that date?  Do I go to the nursing home and ask Uncle Sam what he paid for the stock? Or, do I make something up within reason.

Yikes what a mess!  There are several solutions:

  • Don’t sell the shares and forget about the problem.
  • Sell the shares and make up a number, the IRS might not like that too much and neither will you if they ask for proof.
  • Try and find his broker who may also be in the nursing home or if for all you know in jail and all his firm will do for you is let you communicate with their computers.

The following is a more intelligent narration with better answers. Keep your sense of humor, the IRS looses papers and so can you! I strongly suggest that before booking capital gains or capital losses, you consult with your tax adviser.

Typically when selling stock, you calculate your profit or loss by deducting the amount paid for the stock (the original purchase price which is known as the cost basis) from your selling price, excluding any brokerage commissions and transaction fees.

Dividend Reinvestment Programs DRIP

Many people invest in dividend producing stocks. They have their dividend issued to them in the form of additional shares of the same company. This is called a dividend reinvestment program also known as a DRIP.  How do you calculate your cost basis if you are participating in a DRIP?   Furthermore if you received the shares at different prices, how do you add this to your cost basis?

This scenario does get a little bit complicated.

To begin, take all your long term purchases (stocks held over a year) and add the costs together.  You have then formed an average cost basis for all your long term investments.  You will then take all your short term purchases (stocks held for less than 12 months) add those cost together and you will have formed an average costs basis for your short term investments.

You will then deduct long term cost from long term sales and the short term cost from the short cost sales.  This will give you your cost basis for your DRIP investments.


Many people wonder what is the cost basis for stock that has been inherited?    Your cost basis is the market value of the stock on the day the original owner passed away.


Many people wonder what is the cost basis for stock that was gifted to me?  If you received stock as a gift, then the cost basis is the original purchase price of the security.


What about donating stock? If you chose to donate stock the entire amount donated is considered a deduction

In all scenarios keep in mind that stock splits may cause further complications. Look on the internet and company websites for a genealogical tree listing cost basis affecting events.  It is a good idea to write down the price of the stock on the date in question. Chances are your broker will not have any records for you in the future.  As time passes it will be much more difficult to track down this information.

Say you didn’t keep track of your basis and have lost all of your transaction statements. What should you do?

Ø  The internet is a valuable tool when looking to obtain such information you can go to Google historical prices or similar services

Ø  You can go to the library visit the microfilm room and find an old business newspaper like a Wall Street Journal

Ø  Find out who is the company doing the dividend purchases and ask them for the information. Compushare, is one of the poplar ones.

Ø  The accountant may have some old statements

{Moishe Silver, Newscenter}