[NYT] Tax-Law Shift Gives Investors Tricky Choice on Asset Sales.

From: Adam Rifkin (adam@KnowNow.com)
Date: Thu Jan 04 2001 - 02:49:03 PST

I wonder if the market devastation on January 2 resulted in closing
prices that in the aggregate significantly affect the below...

Heck, I'm still trying to figure out what this article is really
saying. Why do tax laws have to be so friggin complicated?

> Tax-Law Shift Gives Investors Tricky Choice on Asset Sales
> http://www.nytimes.com/2001/01/03/business/03TAX.html
> January 3, 2001
> This is the year when the government thinks many investors will
> decide to voluntarily pay taxes that they do not owe.
> Amazingly enough, that will be a good idea for some investors. For
> others, it would be completely foolish.
> The decision depends in large part on what the investment was
> worth at the close of trading January 2, which is why investors
> may want to save the stock tables in January 3's paper to know what
> that value was.
> The unusual tax situation stems from Congress's decision to change
> the capital gains tax law to give an additional break on assets
> held for at least five years. The top capital gains rate on assets
> held for more than a year remains at 20 percent, but it falls to 18
> percent for those held for more than five years.
> That sounds simple enough, but Congress made it complex. There are
> radically different rules for people in different tax brackets, and
> because the bracket of a taxpayer may change from year to year, the
> rules affecting that investor may do the same.
> For investors in the 28 percent or higher tax bracket -- a group
> that will include most taxpayers with the ability to take
> substantial capital gains -- the new law allows the 18 percent
> maximum tax rate only for assets acquired in 2001 and after.
> So as a general rule, if an investor bought a stock in 1999 and
> sells it in 2006, that investor would still face the maximum
> capital gains rate of 20 percent. But Congress offered that
> investor an out, albeit one that costs money up front.
> The law states that an investor may make a "deemed sale" at the
> value of the asset yesterday, the first business day after the
> five-year period took effect, and then buy the asset back at the
> same price. Then tax would be owed on the "profit" taken by the
> investor, but later gains in the asset, assuming it was held for
> five more years, would be taxed at the lower 18 percent tax rate.
> Theoretically that applies to any assets the investor holds that
> would qualify for capital gains treatment. But for many assets
> without a ready market, that would require an appraisal and the
> possibility of an Internal Revenue Service challenge as to whether
> the value was realistic. So in practice, it is likely that most
> investors will use it primarily for stocks. The Jan. 2 value is set
> by law at yesterday's closing price.
> To make the decision about whether to make a deemed sale,
> investors will have to calculate the basis in a stock -- that is,
> what was paid for the stock, including commissions paid. It is
> worth noting that an investor may have different bases for
> different blocks of the same stock that were bought at different
> times. Moreover, if an investor is in a dividend-reinvestment plan,
> he or she will have shares bought at different prices after each
> dividend payment.
> Different decisions can be made for each block of stock, so good
> records may be crucial.
> In general, if an investor has a large profit in a stock as of
> Jan. 2, he or she will not want to make the deemed sale. But if
> that investor has a small profit, or exactly broke even, a deemed
> sale may be a very good idea.
> If the investor has a large loss, however, a deemed sale would be
> a very bad idea. That is because Congress made deemed sales a
> one-way street. If an investor makes a deemed sale of a stock at a
> lower price than the cost of the stock, that loss would simply
> vanish. For example, if an investor bought a stock at $40, and it
> is now at $35 and he or she elected a deemed sale, then the new
> basis would be $35, and he or she would wind up paying capital
> gains taxes based on the gain from $35. But there will be no tax
> benefit from the "loss" taken now.
> An investor with a substantial loss who expects to hold a stock
> for a long time and has confidence that it will recover might
> choose to make a real sale, taking the capital loss and getting the
> tax benefit. But the investor would have to wait at least 31 days
> before buying the stock back. The risk would be that the stock
> would recover during the period that the investor was out of the
> stock.
> So how does an investor decide whether to make a deemed sale?
> It is almost impossible to know in advance whether the decision will
> work out. The exception is for a stock that happens to close on
> Jan. 2 for exactly what the investor paid. Then a deemed sale
> produces no tax, and the investor is sure to be no worse off.
> Of course, a new holding period also starts when the deemed sale
> is made. So that investor might have to pay higher short-term gains
> rates if the stock was sold later in 2001, before a year has
> passed. But there is no danger of that because the deemed sale
> election does not have to be made until the 2001 tax return is
> filed, usually by April 15, 2002. So if the investor does end up
> selling the stock before that tax return is filed, he or she would
> simply not make the election.
> To calculate whether the deemed sale is a good idea for stocks on
> which the investor already has a profit, one has to take into
> account several factors. First calculate the tax that would be owed
> on the deemed sale. Include any state or local income taxes that
> would have to be paid.
> That is the upfront cost. Then one has to make an assumption as to
> the profits one could make on that money if it was invested instead
> of being paid to the government with the tax payments due in 2002.
> And one has to make an assumption regarding when the stock will
> eventually be sold.
> With that information, one can calculate just how high the stock
> would have to go by 2006 to make it profitable to have made the
> election and paid taxes now, thereby qualifying for the 18 percent
> tax rate in 2006.
> One way to make the calculations is by using a calculator posted
> on the Internet site of Twenty-First Securities, a firm that
> specializes in tax strategies, at www.twenty-first.com .
> Using that calculator, and assuming state and local tax rates of
> 10 percent and the ability to earn 6 percent a year on money not
> used to pay taxes, the calculator showed that investors have be
> very optimistic about stocks on which they already have a
> substantial profit to justify making the deemed-sale transaction.
> Assume, for example, that a stock closed yesterday at $40 and that
> an investor has owned it for more than a year and therefore is
> qualified for the 20 percent long-term capital gains tax rate.
> If that stock cost the investor $39, then if the stock gets to
> $44.40 in five years, the investor would be better off if he or she
> had made the deemed sale. If the investor is not hoping for more
> than that, it is hard to understand why he or she is holding the
> stock anyway.
> But if the cost of the stock was $35, a target price of $62.02
> would be needed. And if the cost basis was $20, the investor would
> be wise to make the deemed sale only if the stock was expected to
> rise to $128.07.
> As if all that were not complicated enough, the rules are
> different -- and much more friendly -- for investors whose income
> leaves them in the 15 percent marginal tax bracket. For a married
> couple, that means taxable income, including any capital gains, of
> less than $43,850. Such a taxpayer now pays a long-term capital
> gains rate of just 10 percent.
> The rate on assets held for five years, starting this year, is
> just 8 percent, and for taxpayers in that bracket there is no need
> for the holding period to start in 2001 or after. So such a
> taxpayer who bought stock more than five years ago could sell it
> today and get the 8 percent rate.
> One group of taxpayers who could benefit from that are retired
> people who might have substantial assets but little current income.
> They can, starting this year, sell stocks they have held for at
> least five years and get the 8 percent tax rate. But they have to
> be careful not to realize too many gains, lest the gains push them
> into a higher tax bracket.
> For taxpayers who are trying to decide whether to report a deemed
> sale at yesterday's closing stock price, there is no need to make
> an immediate decision. But an investor can consult today's paper to
> learn the price at which a sale might be made and can conclude from
> that which blocks of stock should not be sold this year.
> For example, imagine that an investor owns a substantial amount of
> Microsoft shares bought over the years. While the investor expects
> to sell some stock in the next several years to finance a child's
> education, he or she plans to hold on to other shares for a number
> of years. That investor might consult records to see whether any of
> the shares were purchased at, or very close to, yesterday's closing
> price of $43.38. Then those shares could be set aside as shares not
> to be sold in 2001, and a deemed sale could then be declared for
> them on next year's tax return with little or no tax owed.
> Then, if those shares were eventually sold after 2006, the tax on
> the gain would be 18 percent of the profits, rather than the 20
> percent if no action were taken.


NEW YORK -- Stocks surged Wednesday after a surprise interest-rate cut by the Federal Reserve soothed worries about earnings and the slowing economy, which have dogged Wall Street for months. Bond prices sank.

The Nasdaq Composite Index posted its biggest one-day gain ever in point and percentage terms, jumping 324.83, or 14.2%, to 2616.69. The rally, which came after the index dropped 7.2% Tuesday to its lowest close since March 3, 1999, easily tops its previous record surge of 274.05, or 10.5%, on Dec. 5.

The decision marked the first decrease in rates in two years. Starting in June 1999, the Fed embarked on a year-long campaign of rate increases meant to cool the economy to forestall inflation. The Fed had left rates unchanged since May following a string of six increases, and only last month stated that the threat of an economic slowdown outweighed the threat of inflation.

Dow Jones 10945.75 +299.60 NASDAQ 2616.69 +324.83

-- http://www.quicken.com/investments/news/story/djbn/?story=/news/stories/dj/20010103/on20010103000571.htm

This archive was generated by hypermail 2b29 : Fri Apr 27 2001 - 23:17:57 PDT