Chicago Tax Lawyers

With the Bush tax cuts slated to sunset at the end of this year, and tax rates expected to increase in 2011, investors and taxpayers find themselves presently in a complex situation regarding capital gains.  This previous post explored how realizing long-term capital losses and gains in different years can provide overall tax benefits, especially in light of the end of EGTRRA.  This post will expound on further dynamics of the tax situation.

An investment may at present have produced losses which the taxpayer would like to realize for tax benefits, but the investment may also be attractive to hold onto.  It is not possible to have both exactly because of what’s known as the wash rule.  This rule prevents someone from recognizing a loss when essentially identical securities are bought and sold within a 61 day cycle—30 days before or 30 days after the sale.  There are a few options which may allow you to preserve some of the advantages of your current position while also reaping the benefits of a capital loss.  You can sell stock now, realizing the loss, and buy it back 31 days later.  You can also double-up, buying additional stock, then selling the original shares after 31 days.  In both of these cases the risk is of course that the stock price will move.  If the positive outlook for a stock is due more to the industry than to the particulars of the company, you can sell your shares in the initial company, realize the loss, and buy shares in a similar company in the same field.  Likewise mutual fund shares could be sold and new shares bought in a fund that uses a similar strategy of investment.

Another possible scenario is the investor with plenty of capital gains but few losses to offset them.  In such a situation you may want to recognize the gains now to lock in the 15% rate, but there are no guarantees the capital gains rate will increase next year.  That question should be resolved in the lame duck session of Congress following the November 2^nd election.  As always investment strategy should likely trump tax benefits.  Regardless of a possible increase in capital gains next year, it may be a sounder strategy to hold onto investments, expecting future appreciation to eclipse an increased tax liability.

Your situation will be unique and the complexities of your particular tax and investment involvements are best handled with the counsel of professionals.  For more information on end of the year tax planning, capitals gains tax issues, or other tax concerns, contact the Chicago attorneys of Horowitz & Weinstein.

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