Press Releases

2008 Press Releases

Capital Gains Taxes: Top Tips from Folio Investing

12/22/2008

VIENNA, Virginia, December 22, 2008 – Capital gains tax is a tax incurred on the profit realized from the sale of an asset that was purchased at a lower price. You need to factor these gains into your overall tax liability and plan accordingly so you don’t get hit with an unexpectedly large tax bill when it comes time to file your return. Even better, use some of our tips to reduce your tax liability:

1. Defer or Offset Capital Gains and Capital Losses

   Short-term capital gains and losses are different than long-term capital gains and losses.

   • Long-term capital gains/losses are from sales of capital assets (like stocks and mutual funds) held for more than 12 months and they are typically realized at a 15% capital gains rate.
   • Short-term capital gains/losses are from capital assets held for one year or less prior to sale and are typically realized at a higher rate depending on your tax bracket.

   What does this mean to you?

   You can “harvest” short-term capital losses by selling positions that you have owned for one year or less and that have lost value. These losses, and any long-term losses, can be used to offset short-term capital gains you may have. In addition, you can deduct up to $3,000 (or $1,500 if married but filing separately) in capital gains from ordinary income in any given tax year; capital losses above these limits can be carried forward to future years. Note that you must apply your short-term losses first toward the $3,000 limit.

   If you are looking at potential capital gains, the preferential tax treatment for long-term holdings means it makes sense to keep any winners for more than 12 months. By doing so, you enjoy the lower, 15% tax rate on long-term capital gains.

   If you own just one or a couple of mutual funds—you can either sell or hold—but you don’t get much of an option. If you have an entire portfolio of 50 stocks that equal the mutual fund, you could sell the losers and keep the winners, thereby harvesting tax losses and deferring gains.

2. Minimize Mutual Fund Taxes

   Did you know that you can be hit with a taxable gain on a mutual fund, even if you’ve only held the fund for a day, or if the fund has had a loss for the year, and even if you do not sell the fund? Mutual funds can cause tax problems because investors have no control over when and how much their funds realize in gains and distribute to them as holders of the fund.

   Each year, mutual funds are required by Federal law to distribute to all their shareholders at least 98% of the realized capital gains, interest and dividends the fund receives from its investments. So if a fund manager sold stocks or bonds at a profit during the year, and had no offsetting losses from that or previous years, then shareholders who hold shares when the fund distributes those gains will receive a taxable distribution (if you’re in a tax-sheltered investment like an IRAs, then it doesn’t really matter).

   Get smart about when your mutual funds distribute their annual gains and losses. That usually happens late in the year, but you can usually find out the date from a mutual fund company’s web site or investor relations department. Or, you can consider investing in portfolios of securities instead of with mutual funds to eliminate or reduce your exposure to these issues.

3. Understand the “Wash Sale” Rule

   It’s important to remember the IRS “wash shale” rule. Under this provision, if you sell your holdings at a loss, you invalidate that loss if you repurchase the same holdings within 30 days before or after the sale.

   However, an easy way around the “wash shale” rule is to buy similar, but not identical, securities, when replacing the original asset.

4. Automate Your Tax Preparation

   If you’re a self-directed investor, either for all or part of your holdings, consider ways to quickly and easily export your information to Quicken, TurboTax, or other financial planning and tax management software. Not only can these packages help you manage your capital gains and losses, but they can assist with retirement and other long-term financial planning.

How Folio Investing Helps You

To help you defer or offset capital gains more easily, Folio Investing tracks every trade you make by tax lot, and shows you what your cost basis is on each purchase with our Tax Management Tools. Plus, your account is automatically set to “Minimize Gain or Maximize Loss” whenever you sell in order to offset capital gains for tax purposes, but you have the flexibility to change it to one of our other tax lot strategies to what works best for you.

Our investment portfolios are a mutual fund alternative and can consist of different securities that you buy, sell and customize in a single transaction. Some of the key differences between our investment portfolios (called “Folios”) and a mutual fund are:

• Mutual funds may have unintended tax consequences
• Mutual funds charge fees based on your assets—Folios do not
• Mutual funds give you no control over the stocks they own, buy, or sell—with Folios you have direct control

Folio Investing customers also have the option of buying Folios that address specific investment strategies.¹

Since you have complete control over what you own and when to sell each security in your Folio, you can easily harvest tax losses, defer gains, and avoid wash sales. Because Folios are not mutual funds, there is never any forced distribution of a capital gain like a fund (you can own mutual funds in Folios if you wish, in which event there may still be the forced distribution from those funds).

Finally, we provide downloads in the standard tax exchange format (.txf), so that you can easily import investment data directly into tax software like Intuit’s TurboTax and H&R Block’s TaxCut. We also make it easy by providing PDF downloads that can be attached to your tax returns. See our Tax Management Tools section for more information.

As you look forward to 2009, it’s important to keep in mind the tax implications of your investment decisions. In these difficult times, it makes sense to reduce costs, like taxes, whenever possible. Folio Investing can provide an easy, powerful, affordable way to both invest smarter and control your taxes.

About Folio Investing

Folio Investing, a division of FOLIOfn Investments, Inc., is an online brokerage that enables investors to manage stocks, ETFs, and mutual funds as integrated investment portfolios called “Folios” that deliver better control, greater transparency, and lower cost. Investors can create their own Folios, much like creating personalized ETFs or mutual funds, or invest in over 100 Ready-to-Go Folios representing market indices, sectors, geographical regions, target dates, and more. The Folio Unlimited Plan features unlimited commission-free trading in twice-daily windows for only $29 a month or $290 a year. Ready-to-Go Folios can be managed or unmanaged, are not registered investment companies, and are offered by FOLIOfn Investments, Inc., a registered broker-dealer. FOLIOfn Investments, Inc. does not provide investment, tax, or legal advice. FOLIOfn Investments, Inc., is a member of FINRA/SIPC.