2021 Stock Market Portfolio Savings
There is big money to be saved with a bit of Stock Portfolio planning
Crypto is big these days. A lot of clients are coming to us with significant gains in crypto trading. Much of the trading and consequently gains are short-term.
There is big money to be saved with a bit of Stock Portfolio (or Crypto Portfolio) planning. This year, in 2021, we have two main objectives.
Avoid the 40.8% taxes on short-term capital gains & income
Lower the taxes to (ideally) zero.
If we can’t get the tax rate to zero, we can at least bring the tax down to the favored long-term capital gains tax rate, 23.8%, saving almost a fifth of every dollar you make.
Basic Overview:
Short-term capital losses can be harvested, i.e., used to offset short-term capital gains, and long-term capital losses can offset long-term capital gains. However, once all the gains of one kind have been offset, the remaining losses can be applied to the other type of capital gains.
Because short-term capital gains are taxed at a significantly higher rate than long-term capital gains, it would be most beneficial to harvest long-term capital losses to offset short-term capital gains. However, this is only allowed if all long-term capital gains have already been offset.
Contrarily, it may be beneficial to choose not to harvest short-term capital losses this year if they can only be applied to unrealized long-term capital gains.
1.
Consider your portfolio for stocks you want to unload, specifically for those taxed as STCG (short-term capital gains). Harvesting these will make the greatest difference in offsetting your tax burden.
2.
For a joint return, use long-term losses and deduct against ordinary income, which, like short-term gains, are taxed at a total of 40.8% (combining Federal, State, and Local) taxes. Again, the principle is to use the loss of 23.8% to deduct money taxed at a 40.8% tax rate. The same principle applies one tax bracket down; you can harvest losses taxed at 0% to deduct income taxed at 12%.
Keep in mind that you must keep the stocks for at least 30 days to be able to harvest them at all; with less than 30 days of ownership, the wash-sale loss rule applies, and those losses fail to be harvestable at all.
3.
Repurchase stocks to purge Capital Gains at the end of the year, even if they are not stocks you want to sell, and immediately repurchase them after the year-end - there’s no rule against this!
4.
If you plan to donate to a family or charity, consider donating appreciated stock rather than simply cash. This strategy gives us a double tax benefit.
Firstly, you get to deduct the Fair Market Value of the stock as a charitable donation.
Secondly, you don’t pay any of the taxes you would’ve had you sold the stock.
You get to take a larger deduction than the value you originally paid for the stock, and in the case that you are donating stocks taxed at a short-term capital gains tax rate, you avoid the 40.8% tax you would have otherwise paid.
Your deductions for donating appreciated stocks to 501(c)(3) organizations cannot exceed 30% of your AGI; if they do, you can carry the deductions over for up to 5 years.
Give only appreciated stocks to charity. You can use that Tax-loss as a deduction against your tax earnings, whereas you cannot do so if that money is given to charity.
That’s all there is to it!
I’m here to help. If you find any of this confusing, set up a tax planning consultation with me, Chakra, at www.Junglebooks.net.