Year-End Investment Strategies

Year-End Investment Strategies

Year-end moves that can improve your tax situation

Year-End Tax Planning Part III: Investment Strategies

As the end of the year approaches, individual investors should take a look at year-end moves that can improve their tax situation for 2011. Year-end strategies can have a significant impact on what you owe for 2011 as it draws to a close.

Some of these strategies could be applied to any year. Others are based on the particulars of the economy and the current tax situation. While the current low tax rates will continue through 2012, rates for higher-income taxpayers could increase substantially beginning in 2013.

Capital gains

Long-term capital gains and qualified dividends continue to be taxed at favorable rates through 2012. For middle- and higher-income investors, these items are taxed at a maximum rate of 15 percent, a much lower rate than ordinary income. Taxpayers in the 10 and 15 percent ordinary income brackets do not pay any taxes on long-term gains and qualified dividends. Short-term gains are taxed at ordinary income rates.

To obtain long-term rates, investors must hold the asset (such as stock and most other property) for more than one year. The holding period begins on the day after you acquire the asset and ends on the day you dispose of the asset.

Example: If you bought stock on November 30, 2010 and sold it November 30, 2011, your holding period is exactly one year, and any gain (or loss) is short-term. If you instead sold the stock on December 1, 2011, your holding period is more than one year, and gains (or losses) are long-term.

Rates on long-term gains may increase dramatically after 2012, depending on the status of the Bush-era tax rates. Long-term rates will increase to 20 percent if Congress takes no further action. The Obama administration has proposed to reinstate the 20 percent rate, but only for individual taxpayers with income of $200,000 and married taxpayers with income of $250,000. To ensure that you can take advantage of long-term rates in 2012, you may want to make particular stock purchases before the end of 2011. For 2011, December 30 is the last day on which stock exchanges are open, since December 31, 2011 is a Saturday.

Capital losses

If the value of your investment has dropped, you may want to sell the item and realize the loss. (If you believe the investment will increase in value, it may still be worthwhile to hold on to it.) Capital losses are netted against capital gains. Net capital losses (both long-term and short-term) can be deducted against ordinary income, up to $3,000 a year. Any excess capital losses above $3,000 cannot be used and have to be carried over to the succeeding tax year.

Wash sales

For stock that has dropped in value, it may be tempting to sell the stock, realize the loss, and then repurchase the same stock, so that you can benefit from any improvements in the market. However, if you purchase the shares within 30 days before or after you sell the stock, the wash sale rules deny the loss. The disallowed loss is then added to the cost of the new stock, and the loss is not recognized until the new shares are sold. To avoid this treatment, one solution is to wait at least 31 days and then purchase the stock.


Stock is generally treated as sold on the trade date, the date the taxpayer enters into a contract to sell the stock. The trade date should be distinguished from the settlement date, the date that the investor delivers the stock certificate and receives payment. The settlement date may be 3-5 days after the trade date. The trade date also determines (and ends) the holding period for the seller.

Example: You bought stock on December 28, 2010 and sold it on December 29, 2011. The settlement date is January 3, 2012. The treated is treated as sold on December 29; any gains or losses are recognized on your 2011 tax return.

Short sales

The rules are different for a short sale, where the taxpayer initially sells shares and then must obtain shares to close out the transaction. If the stock price falls, so that the investor will realize a gain, the gain is realized on the trade date, when the seller directs the broker to purchase shares. If the price rises, so that the investor will realize a loss, the loss is realized when the stock is delivered on the settlement date.

FIFO rule

If the investor sells identical blocks of shares that were purchased at different times, the basis and holding period of the shares sold are determined on a first-in, first-out (FIFO) method, unless the shares are specifically identified. If the investor does not identify the shares that are sold, the broker has the option to specifically identify the shares.

These identification rules are particularly important, because, brokers must report not only the proceeds from a stock sale but the basis and holding period of the stock, if the stock was originally purchased on or after January 1, 2011. If the stock was purchased before 2011, the broker does not need to report the basis. The basis reporting rules will be extended in 2012 to shares in a mutual fund and shares obtained through a dividend reinvestment plan.


As you can see, investors have a lot to consider as the year-end approaches. If you have any questions or would like to discuss these matters further, please contact our office at (208) 356-8500.