Capital Idea

I suppose I haven't written about capital gains in a while because there haven't been many. After tax year 2008 when there were more losses realized in the stock market than in all of previously recorded history combined (that's not really true, but it feels that way), the questions mostly centered around "what am I going to do with all those losses"?

Capital Asset

Let's back up a second. The things that create capital gains and/or losses are capital assets. What is a capital asset? Many of you simply relate that to investments like stocks or mutual funds.  Actually, it's much more than that. Simply, it is any property except: inventory, property held for sale to customers, a note or account receivable, depreciable business property, real property used in a business or a copyright, literary or musical composition held by the one who created it. Okay, enough for the tax jargon. For most people, this is just about everything they own. Your house, your car, your clothes, your bicycle. These are all capital assets.  And, yes, if you sell any of them you should report the gain or loss on your tax return.  There is a "gotcha" here: if you sell your house, its furnishings or your car at a gain, you have to report it and pay tax on it. However, if you sell these items at a loss, you can't take it unless the property was used for business purposes. Uncle Sam loves ya!

Capital Losses

You may be one of those people who took a big hit during tax year 2008 and have a pile of capital losses from the stock market. The rule is that you can offset these losses with future gains. If you don't have future gains, you can offset your other income up to $3,000 per year. If you're saying that the $3,000 per year will last you a lifetime, don't worry - you have a lifetime. These losses never expire until you do. You can take the $3,000 every year until you die. Clearly not the best scenario.  There are trading strategies which are geared toward recognizing short term gains. These would be great for those with unused losses because the gain recognition is "free" until the losses are used up.

Capital Gains

If you dodged the debacle of 2008 and are recognizing capital gains that will be taxed, here's the scenario: Long term gains (the sale from those capital assets held greater than 1 year) are taxed at a preferential rate of 15%. Short term gains (anything held less than 1 year) are taxed at your ordinary rate. For those lucky folks who live in Taxachusetts like me, they get an extra whack. Our short term gains are taxed at 12% for state purposes.  Don't necessarily let the tax tail wag the dog, but if you can hold long term, it is much better tax treatment all around.

Capital Idea

The stock market clearly has been a wild ride the past couple of years. For many people 2008 was a very rude awakening that you can't just throw a dart at a stock board and pick a winner. Everyone needs to pay much greater attention to their investments. This is especially important for those whose investing time horizon is short and will not allow them enough time to recover from a large downturn.  Over time, the best place for your money is the stock market, but you have to be vigilant. If you don't have the time or knowledge to do it yourself, choose your investment advisor carefully. I know there have been enough crooked ones out there to scare off anybody. There are also many good ones.  If you are a little bit leery, don't put your eggs in one basket. You can have multiple advisors, or you can give one a piece of your investable assets instead of all of them. Remember, it's your money and your future. Do it right.