By Tony Delane, CFP®, AIF®, Associate Wealth Advisor
Whether your custodian is Fidelity or Schwab, your monthly statements 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.
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 in the account. 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 tax rate for securities that are held more than one year is typically more favorable than a normal income tax rate. For example, a security held for over one year 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.
At the end of the year, gains taken throughout the year can be reduced by losses taken. It’s important to track these transactions throughout each year to avoid tax surprises when it comes time to file.
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 – whether that’s Fidelity or Schwab – to monitor and update this information for you on their website and on your monthly statements. We have prepared a brief guide on where to locate your gains, losses, and other pertinent data on your Fidelity statement.
View our 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 have prepared a brief guide on where to review this information on your Schwab statement.
View our Schwab Investment Statement guide here.
Understanding Tax Implications of Realized Gains/Losses
Properly managing realized gains and losses is a key part of our approach to optimizing your tax strategy. We’re careful to track when securities are held for over a year (long-term gains or losses). When a sale of securities generates long-term capital gains, these will receive more favorable tax treatment than short-term gains.
We use our frequent review meetings to get an update on your full financial picture, so 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 potentially apply these to partially or fully offset the current year’s gain, thereby trading more effectively.
Optimizing Your Investment Strategy
In addition to what we’ve mentioned above, there are strategies we’ll use such as Tax Loss Harvesting that further optimize your taxable account management, aimed at minimizing the taxes you’ll pay.
April 15th is approaching, but we’re monitoring your portfolio’s tax exposures every month of the year. Please reach out to your Halbert Hargrove advisor with any questions, and their tax implications.
