Simple. When you sell a stock that you own, you realize gains (or losses). Short-term gains, realized within a year of buying and selling an asset, are taxed at your maximum (or marginal) tax rate. Long term-gains, realized after a year, are taxed at a lower, preferential rate.
Since lowering your year-end tax bill is the goal, let’s see which realized gains (or losses) can benefit you the most.
The first thing to consider is losses. Losses can be cancelled against gains, reducing your tax liability. Losses can also be carried over to the next tax year and be redeemed against those gains. Keep in mind, short-term losses can be balanced against both short- and long-term gains; long-term losses can only cancel out long-term gains.
When you own a bunch of the same type of stock, bought at different times and prices, you can choose which shares to sell. This allows you to decide whether you realize short- or long-term gains (or losses). This process of matching shares is known as lot matching (or order matching).
Let’s assume you bought three shares of S&P 500 between January 2006 and December 2007:
In the graph, we see that the S&P 500 dipped to $1,450 in July 2007. To avoid any further losses you decide to sell a share. Which one will you sell?
You should sell Share C. It provides a negative tax liability, which can be used to offset gains.
Order matching is independent of the investment strategy. As seen here, the decision of which share to sell comes after the decision to sell.
After extensive research, we found the existing order matching techniques to be sub-optimal. To ensure that our investors get the best returns, we developed qplum tax saving.
qplum tax savings is pretty straightforward:
We sell the shares that lost value before the ones that gained value. Booking losses reduces your taxes; booking gains increases them.
So we book short-term losses, followed by long-term losses. As mentioned before, short-term losses can be balanced against both short- and long-term gains.
Next, if all the remaining shares have gains, we sell those you purchased earliest since gains are taxed at a long-term rates, and delaying the booking of gains converts short-term gains into long-terms ones.
As you might’ve imagined, we’ve back-tasted a lot of data to come up with our tax saving strategies. And, we don’t want to brag, but the qplum tax allocation strategy is the best.