Tax avoidance strategies for stock investment gains?

In the USA how do investors keep capital gains tax from "blowing the profits all too pieces"?

I have read the capital gains page on the IRS website.

Granted they will not explain unique yet lawful ways of minimizing the capital gains tax bill due...

So what info do you have to share.. that would not send a CFO or tax preparer reeling in desperation?

Lengthy explanations welcome, thanks Tim.

You can defer taxes by trading in a self directed IRA. The only other alternative is to buy and hold your stock. Paper gains are not taxed, but dividends will be. The first choice is the best.

Funny you should ask. The Roth IRA account is set up exactly for that purpose. All money earned in a Roth IRA account is tax free provided you do not withdraw it before 59 1/2. Only draw back is that you can deposit only $4000 annually into the account provided you make that much in earned income. Darn shame too.

There is not a lot of fancy stuff you can do outside of IRA's.

But, these here are some legal ways to lower your capital gains, each has their downfalls.

1. Buy and hold.

2. Avoid mutual funds that have a history of large capital gains distributions.

3. Do "tax-loss" selling... sell something with an off-setting loss at the same time you sell something with a gain.

4. Donate appreciated shares instead of donating cash. You can write off th entire value, and avoid cap gains on the appreciation (there are holding period rules).

5. Gift appreciated shares to your children, and sell them in a UGMA / UTMA account. A portion of the gains will be taxed at their bracket.

6. Consider using a exchange fund (not an index fund, or exchange traded fund) for concentrated positions. These are special funds that will let you trade in a concentrated position of a stock (ie, $250,000 of Microsoft) for shares in a more diversified portfolio. These are also known as swap funds.


Hope that helps!!

Ken Clark
Certified Financial Planner

The previous answers are pretty good. Obviously you should do a 401K, &/or traditional IRA, &/or Roth IRA. But let's assume we are talking about taxable account.

You probably know this, but you can try to hold your stock winners at least 1 year before selling, then you a subject to the 15% long-term capital gains tax. Did you know, that if you are in one of the lower two tax brackets, then the long-term cap. gains tax rate is only 5%? !!!

Here is an old standard trick that I'm going to try for the first time.

I owned some ETFC before the Aug. downturn & made the mistake of buying some more after the first 10% decline. After the stock got crushed, I sold a couple pieces on small rebounds; the last sale was Aug. 16

So in the first half of '07 I had a large amount of capital gains, & I have a medium large loss on ETFC. If I wait until Monday Sept. 17, I can buy some of the ETFC back at a price that is about the same as the sells prior to Aug. 17.

In this case the IRS "wash rule" allows me to declare a capital loss on the Aug. sells, as long as I wait 31 days before I buy the stock back. This way I've reduced my capital gains taxes on my early '07 gains, without materially changing the status of my ETFC holdings.

The worry here is that the price of ETFC could go up alot while you are waiting the 31 days. A standard tip is to buy a comparable stock on the same day you sell your loser (the one you don't really want to sell). Perhaps both stocks will move up by about the same amount.

I.e. I could have bought AMTD on the day I sold ETFC. This probably would have been a bad choice, because ETFC's problems are caused by a med. large holding of mortgage backed securities, which is an issue that AMTD doesn't have.

Another interesting tid-bit is that if you read the letter of the IRS wash rule, it says that you may not declare the capital loss if you buy the same or similar type of stock back within 30 days. So technically, the AMTD purchase violates the purpose of the whole exercise.

My guess is that many folks play this game anyway, in defiance of the fine print. Who is to say what a "similar" stock is?

When preparing your tax return, you may be tempted to settle for the standard deduction rather than figuring out a whole series of individual items, which is known as itemizing. But you can save a lot of money by itemizing, especially if you own your home or live in a high-tax area.

You've probably heard that you can take an itemized deduction for things such as mortgage interest, property taxes, and charitable donations. But there are a number of often-overlooked deductions that can save you money

the list of possible deductions is huge to explain. May be you can google around. I found this link, can be useful to you. check it out.