Friday-Last day for tax sellers
Losers in Your Portfolio? A Housecleaning Deadline Is
Near
By ROBERT D. HERSHEY Jr.
lthough the stock market has posted another huge gain so far this year, many portfolios still
have losers -- Digital Equipment or Apple Computer, say, or maybe Bethlehem Steel.
Selling such stocks can yield big tax benefits, and that course may look especially appealing if you
have cashed in profits elsewhere and don't want to write a big check to the government in April.
But sometimes the losers seem to have bright prospects, and to part with them permanently may be
misguided. Wal-Mart shares, for example, were pummeled in late 1995, only to rebound smartly at
the beginning of 1996.
If you hold such a promising loser, there is a way to sell shares for the tax advantage and then to
buy shares in order to keep your stake in the company. But at this time of year, you must act within
the next few days to avoid a collision with the government's "wash sale" rule.
Under it, you cannot claim a tax loss on the sale of a stock or bond if you have acquired -- or have
a contract or option to acquire -- a "substantially identical" security within 30 days before or after
the sale.
The simplest strategy is to sell the stock to establish the loss, and then buy it back before year-end
to take advantage of low stock prices created by other last-minute tax-sellers.
To get both deals done by year-end and skirt the wash-sale rule, the first transaction must happen
by Friday, Nov. 29.
Another popular method is "doubling up," which involves buying the same number of shares you
already own, then waiting until the 31st day after that, and selling the original stock. This tactic
assures that investors are never without the stock, in the event it begins to appreciate.
But here, too, you must buy the additional shares by Friday so the existing position can be sold by
Dec. 31, enabling you to qualify for the 1996 tax break and to skirt a wash sale. The date of the
trade, not the settlement, governs.
If you cannot lay out the money for more shares without selling your original shares first, you can
achieve the same result by getting an option to buy the shares at a specified price, according to
Michael Schwartz of Oppenheimer & Co. Of course, you will need to be mindful of the wash-sale
rule, but you will at least have in hand the money from the sale, and any interest, when you are ready
to buy.
The wash-sale rule applies to mutual funds, too, so be careful about redeeming shares at a loss if
you will be buying more within a month. And keep in mind the automatic reinvestment of dividends
or capital gains.
If you are thinking about selling shares, consider asking the fund to suspend reinvestment
temporarily.
Although the wash-sale rule seems clear, individual cases can present twists. If a corporate bond is
exchangeable for the same company's shares, for example, is the exchange considered a "sale" so
that the investor qualifies for a tax deduction?
"If there's a conversion feature, I'm uncomfortable," said Betsy E. Dow, vice president of the
private-client group at A.G. Edwards, the brokerage firm. But while she believes the transaction
would not create a tax loss, she is unsure what the answer would be if the conversion was at the
company's option, not the investor's.
The penalty for violating the wash-sale rules is a longer wait to claim your deduction.
Specifically, you add the amount of the disqualified deduction to the cost of the shares you just
bought. That will reduce the eventual tax you pay on their sale. But if you buy and hold, it could be a
long time. |
