Cutting Down on Capital Gains

One of the rules of thumb, when it comes to capital gains, is that unless you have a loss sitting there to offset some of your gains, you should sell off smaller gains. To do this with your stocks,

you will need to know which shares you purchased at which time. If for example, you purchased a stock at $12 per share, and later purchased more at $18 per share, when the stock hits $24 per share, you will have less of a capital gain by selling the shares purchased at $18 per share. To do this, you must keep very good records of when you purchased your shares of stock and at what price.

You’ll also want to wait and sell of shares of stock, or any investment, after holding it for more than one year, to benefit from the 5 percent lower capital gains tax rate. Once the investment passes the one-year mark, thanks to recent tax law changes, the capital gains tax is lower.

What about capital losses? You can actually benefit from your losses. If you see capital gains growing and you also have a losing investment, take the loss to offset your capital gains by $3,000 (which is the maximum you can deduct as a capital loss in one year). If it turns out that you have a major loss, you can spread that loss out of the next several years. For example, if you have a $15,000 loss in 2004, you can deduct $3,000 in 2005 and for each the following four years up through 2009.