30.1 Planning Year-End Securities Transactions

First establish your current gain and loss position for the year. List gains and losses already realized from completed transactions. Then review the records of earlier years to find any carryover capital losses. Include nonbusiness bad debts as short-term capital losses. Then review your paper gains and losses and determine what losses might now be realized to offset realized gains or what gains might be realized to be offset by realized losses.

If you have already realized net capital losses exceeding $3,000 ($1,500 if married filing separately), you may want to realize capital gains that will be absorbed by the excess loss. Remember, only up to $3,000 (or $1,500) of capital losses exceeding net capital gain may be deducted from other income such as salary, interest, and dividends.

Planning Reminder

December 31 Deadline for 2012 Gains and Losses

If you want to realize gains on publicly traded securities, you have until December 31, 2012, to transact the sale. Gain is reported in 2012, although cash is not received until the settlement date in 2013. If you do not want to realize the gain in 2012, delay the trade date until 2013.

Losses are also realized as of the trade date; a loss on a sale made by December 31, 2012, is reported on your 2012 return.

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Planning for losses.

Realizing losses may pose a problem if you believe the security is due to increase in value sometime in the near future. Although the wash-sale rule (30.6) prevents you from taking the loss if you buy 30 days before or after the sale, the following possibilities are open to you.

• If you believe the security will go up, but not immediately, you can sell now, realize your loss, wait 31 days, and then recover your position by repurchasing before the expected rise.
• You can hedge by repurchasing similar securities immediately after the sale provided they are not substantially identical. They can be in the same industry and of the same quality without being considered substantially identical. Check with your broker to see if you can use a loss and still maintain your position. Some brokerage firms maintain recommended “switch” lists and suggest a practice of “doubling up”—that is, buying the stock of the same company and then 31 days later selling the original shares. Doubling up has disadvantages: It requires additional funds for the purchase of the second lot, exposes you to additional risks should the stock price fall, and the new shares take a new holding period.