By Tony Delane, CFP®, AIF®, Wealth Advisor
Your monthly statements from your custodian contain important information on capital gains and losses that you should keep track of. This article offers a brief overview of the tax treatments of sales of securities – and our approaches to helping you minimize your tax bill.
Key Takeaways
- Realized gains and losses occur when securities are sold. The difference between sale price and cost basis determines the taxable gain or loss.
- Holding period affects tax treatment. Long-term capital gains generally receive more favorable tax rates than short-term gains.
- Tax planning strategies can help manage investment taxes. Loss carryforwards and tax-loss harvesting may help offset realized gains and reduce taxable income.
What Are Realized Gains/Losses?
For taxable accounts, such as Individual, Joint, TOD, and many types of Trust accounts, investors are taxed both on the income produced (dividends and interest) and on the realized gains and losses incurred in the account.
These realized gains and losses are calculated when a security is sold. The custodian will take the difference between the sale price and the original purchase price (or cost basis) to determine the amount of gain or loss realized.
Special tax rules are applied depending on the length of time you’ve held a security. The federal tax rate for the sale of securities that have been held more than one year is typically more favorable than income tax rates.
For example, the gain on a security held for over one year – considered a long-term capital gain – will be taxed at a federal level at 0%, 15%, or 20% depending on your other income. Short-term gains, for securities held less than one year, are taxed at ordinary income rates.
Interpreting Your Fidelity Investment Statement:
While it may sound onerous to keep track of realized gains and losses, it’s the responsibility of the custodian you work with – for example Fidelity or Schwab – to monitor and update this information for you on their website and on your monthly statements. We’ve prepared a brief guide on how to see realized gains on your Fidelity statement, as well as where to locate your losses and other pertinent data.
View HH’s Fidelity Investment Statement guide here.
Interpreting Your Schwab Investment Statement:
Similarly, if Schwab is the custodian you work with, it’s their responsibility to monitor and update information on realized gains and losses for you on their website and on your monthly statements. We’ve prepared a brief guide on where to review this information on your Schwab statement.
View HH’s Schwab Investment Statement guide here.
Understanding the Tax Implications of Realized Gains/Losses
Properly managing realized gains and losses is a key part of our approach to help optimize your tax strategy. We’re careful to track when securities are held for over a year. When a sale of securities generates long-term capital gains, these will receive more favorable tax treatment than short-term gains.
We use our review meetings with you to get an update on your full financial picture. If you have significant realized capital gains from another source, we can take these into account in managing your portfolio with care.
Lastly, one reason we ask for your tax returns annually is to review your “loss carryforwards.” This is the amount of realized losses you didn’t use in submitting your federal tax return in a prior year. We can apply these strategies to potentially offset a current year’s gains, thereby helping trade more effectively.
Helping Optimize Your Tax Strategy
In addition to what we’ve mentioned above, there are strategies we’ll use, such as Tax Loss Harvesting, that can further optimize your taxable account management, aimed at minimizing the taxes you’ll pay.
We’re monitoring your portfolio’s tax exposures on an ongoing basis. Please reach out to your Halbert Hargrove advisor with any questions or concerns you may have about the tax implications of selling securities or other capital assets.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser with its principal place of business in Long Beach, California. HH may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of HH, please contact HH or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com.
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