Tax-Loss
Selling
by Sheldon Jacobs, editor
The No-Load Fund Investor
If
you own funds with shares selling below the price paid to acquire
them, it may be advisable to establish a tax loss now rather
than wait until November or December, for the following reasons:
If the market goes
up between now and year-end, a tax-loss taken now will generate
a larger loss and reduce you taxes more than a loss taken later.
You may avoid November
or December capital gains distributions on the shares you sell.
You'll have a better
fix on your tax situation. Planning can be quite complicated,
so it doesn't pay to wait until the last moment.
Tax-loss selling is
not he same as buying or selling to implement various market
objectives. When a fund is sold to realize a tax loss, the proceeds
should be reinvested immediately in a similar fund to maintain
the same exposure to the market. However, you cannot claim a
loss when you sell a fund (or a stock) and buy back the same
securities within 30 days. that will trigger the IRS's "wash
sale" rule, and your loss will be disallowed. If you want
to buy back the same fund, you must wait more than 30 days. This
is why you should buy a different fund with a similar objective.
Many funds will pay
out sizeable capital gains distributions this fall because they
sold stocks at a profit earlier this year. Thus, losses taken
now may be used to offset capital gains distributions in December.
If your net losses exceed your net gains for the year, you may
deduct up to $3,000 per year against ordinary income and carry
forward the balance of losses to future years.
Gains are considered
long-term and taxable at a maximum federal rate of 20% if the
securities are held more than 12 months. So, if you have a profit
in stocks or funds held just under a year, wait out the additional
time before selling.
You may also want to
consider whether the fund you are switching into is likely to
pay a significant capital gains distribution in November or December,
for this could trigger a tax liability on gains you didn't benefit
from! In most cases, try to switch into funds that have either
paid their capital gains distributions already, or are not likely
to have a large capital gains distributions this year.
One fund in this category
is Fidelity Fifty, which paid an August distribution amounting
to 16% of NAV. Two other funds that recently made huge capital
gains distributions are Warburg Pincus Japan Small Company,
with a whopping distribution equaling 61% of NAV, and Warburg
Pincus Japan Growth, 23% of NAV. If you have you eye on a
particular fund, a phone call to the sponsor will usually give
you the facts.
How big will 2000 distributions
be? The last four years may be something of a guide. In 1996,
equity funds that made a capital gains distribution in November
and December of that year distributed 6% of assets on average.
In 1997, the average distribution increased to 7.7% of assets.
In 1998, the average distribution was 4.7%, and in 1999 it was
5.4%. Thus, there hasn't been mush year-to-year variation. However,
the largest distributions far exceed the averages. Last year
the largest distribution was PBHG Mid Cap Value at 35.6%. My
guess is that 2000 distributions will average in the 5%-6% ballpark,
although some individual funds will be considerably higher.
Some fund groups are already offering tentative estimates of their fall distribution. Vanguard reports that only five of their 54 equity and balanced funds will have capital gains distributions over 10% of assets: Explorer, U.S. Growth, Windsor, Strategic Equity and Small Cap Index. Another 22 will declare in the 3-4% range, and 27 had no realized gains as of August 31.
Editor's Note: Sheldon Jacobs is editor of The No-Load Fund Investor, 410 Saw Mill Driver Road, Suite 2060, Ardsley, NY 10502, 1 year, 12 issues, $139.
