Archive for the ‘Taxation of Investments’ Category

Don’t Sell on Leap Day

February 27, 2016

Capital Gains_100x150We issue this warning once every four years: if you bought an investment on February 28 last year, and you plan to sell it for a long-term capital gain, you need to delay your sale until March 1. This is because of a little-known technicality. Strictly speaking, your holding period for a capital asset includes the day of sale but not the day of purchase. Stock or other assets bought on February 28, 2015 have a holding period that began March 1, 2015, so you have to hold until March 1, 2016 to have a long-term gain. It may seem logical that selling on Leap Day would satisfy the year-and-a-day rule when the purchase was on February 28 of the previous year, but that would be leaping to the wrong conclusion.

An Easier Way to Report Capital Gains

February 27, 2015

Taxation of InvestorsIf you have more than a few sales of stocks, mutual funds or other investments to report on your tax return, you may want to be aware of a recent change in IRS requirements for reporting these transactions.

details: Easier Capital Gains Reporting

New Capital Gains Book Available

January 6, 2015

The 2015 edition of our capital gains book, Capital Gains, Minimal Taxes, is now available. This is a major revision from the previous edition, covering changes in tax rates, broker reporting, mutual fund averaging, and the net investment income tax, among other enhancements.

more info  |  order from

Share Identification Under Attack

January 3, 2014

Taxation of InvestorsOne of the oldest rules in the tax law allows investors to choose which shares are being sold when disposing of part of their holdings in a particular stock. Both President Obama and Dave Camp, Republican Chair of the House Ways and Means Committee, have proposed doing away with this important rule. Our new article in the Journal of Taxation of Investments (subscription required) explains why repeal of share identification would be a policy blunder, accomplishing nothing and creating unnecessary problems for investors. Why aren’t more people objecting to these proposals?

read more: In Defense of Share Identification

Covered Call Strategy Was Not Trading

November 14, 2013
By Kaye A. Thomas

The tax law differentiates between investors and traders. The tax rules that apply to traders are generally more favorable, but only a tiny percentage of all the people who buy and sell stocks and other securities satisfy all the requirements for this treatment. A recent case raises the question whether a taxpayer pursuing a covered call strategy can qualify as a trader.

Waiting for Regs on Net Investment Income Tax

November 7, 2013

This is the first year of the Medicare tax on net investment income, and we’re still waiting for final regulations, which are promised by the end of the year. This tax will cause taxpayers with income above a threshold amount to pay an additional 3.8% tax, on top of regular income tax and/or alternative minimum tax (AMT), on net investment income, including dividends, interest and capital gains. Recent remarks by a Treasury official indicate that the final regs will fix a glitch in the taxation of traders that appeared in the proposed regs, but the official declined to specify how that fix would work. Meanwhile, the IRS has posted a draft of Form 8960, Net Investment Tax (PDF), but don’t expect to learn much by reviewing it. Nearly every line of the form includes the words, “see instructions,” but instructions are not included in the draft. Reason? IRS can’t issue instructions indicating what the regs say until the regs are issued.

IRS Tool for Homebuyer Credit

March 3, 2013

A few years ago, to stimulate the housing market Congress created a special credit for certain people buying homes. It was called the first-time homebuyer credit, although it wasn’t strictly limited to people who had never owned a home. The first version of the credit was really an interest-free loan made through the tax system: qualified taxpayers received the credit in the year they bought the home but had to repay it through “recapture” of the credit over a number of years. If you claimed this version of the credit and are unsure where you stand in terms of repaying it, the IRS has a new tool on its website where you can look up this information. (Taxpayers who used the revised version of this credit do not have to repay it.)

link: First Time Homebuyer Credit Account Look-up

The Mindbending World of Wash Sale Calculations

March 2, 2013
By Kaye A. Thomas

If you’ve made multiple purchases and sales of stock in the same company (or shares of the same mutual fund) within the same year, you may have been surprised at what was reported on Form 1099-B. This report of the tax consequences of your sales may seem to bear little relationship to the actual activity in your account. If your trading activity includes wash sales, it may be all but impossible for you to determine whether the results reported on this form are correct. From what I’ve seen, there’s a good chance they aren’t.


Gaps in Cost Basis Reporting

February 6, 2013
By Kaye A. Thomas

Brokers and mutual fund companies are now required to report your cost basis and holding period in addition to sales proceeds when you sell shares. The requirement doesn’t apply to all shares, however. What’s more, even when they follow all the rules, brokers may report incorrect figures. Taxpayers can’t rely blindly on these reports.

Another Demutualization Case

January 23, 2013

In recent years, many mutual insurance companies, which are owned by their policy holders, have converted to corporations owned by stockholders. In the conversion process, known as demutualization, these companies issued shares of stock to their policyholders. The IRS has taken the position that these shares of stock had zero basis. According to that view, when the shares are sold, the entire proceeds must be reported as capital gain. Some taxpayers have challenged that view, arguing that they acquired these shares as a result of paying insurance premiums, so a portion of the insurance premiums should be considered basis for the shares. Last week, a United States District Court ruling in the Central District of California, Timothy D. Reuben v. United States, disagreed with other courts that have considered the question and held in favor of the IRS, finding that the shares had zero basis.

The courts have now taken three distinct approaches to this issue. The Fisher case applied the open transaction doctrine, so that no gain would be recognized on a sale of the shares. The Dorrance case refused to apply the open transaction doctrine but found that the shares have basis. The Reuben case completes the sandwich, finding that the shares have zero basis.

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