Endofyear Tax Moves For Your Small Business

End of year tax moves for your small businesses

You know the old saying about death and taxes.

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No, you can’t avoid paying your share, but in terms of your trades and investments, you can certainly make a few tax moves to help you minimize the bite—or at least help you avoid paying too much (or worse—running afoul of the tax rules).

But don’t wait too long to tie up those loose ends. After the calendar flips to 2021, it may be too late, and the last thing you want is to get stuck dealing with past issues that you thought were resolved.

For traders and investors, there are a number of unexpected items that may show up when you file your taxes for the previous year. That includes things like wash sales, constructive sales, and substitute payments. And if you’ve shorted a stock, are long a stock in a margin account, or trade broad-based index options, futures, or other so-called Section 1256 contracts, there may be special tax considerations.

Here are a few year-end tax tips as you wrap up your investment activities for 2020.

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Wash Sales

Moves

If you sell a stock at a loss and then repurchase the same stock 30 calendar days before or after the loss-sale date, your trade is considered a wash sale. The wash sale rule is Uncle Sam’s way of telling you that if you plan on maintaining a stock position, you can’t nab tax deductions as your stock moves down in price. Although the wash sale concept is fairly easy to understand, it’s important to be aware of how this 61-day window may affect trades at the end of one year and the start of the next.

Let’s suppose, come December, that you’ve decided to sell stock at a loss for tax-deduction purposes. If you close your position, say mid-December 2020, and repurchase the stock in January 2021 before the end of the 30-day window, you’ve technically made a wash sale. This means you can’t deduct your capital loss for that stock from your 2020 taxes after all, as you’ve carried the trade over to 2021. Note that wash sale rules also apply to “short” positions that are closed at a loss (see more below).

Constructive Sales

Suppose you’re long a stock whose price had risen, but you hear forecasts indicating that it may be in for a downturn. Despite the negative news, you believe your stock is worth keeping for the long run, so you decide to hedge your investment by opening a short position against your long position. You’re now long and short the same stock.

This is called “shorting against the box.” It essentially means that you have locked in, or “boxed in,” your current profit by initiating a new short position against the stock you’re simultaneously holding. If you own, say, 100 shares of a stock that had risen from $100 to $150, you have an unrealized profit of $50 per share. If you short 100 shares of the same stock while simultaneously holding it, you then create a situation in which any price movement from that point on, up or down, will no longer yield profit or loss. You’ve essentially hedged your entire position.

This has some tax implications. Because neither the long nor the short position has been closed—both are still active—your 1099-B won’t show a gain. But technically, you do have a gain: the one you locked in. And that gain is considered a constructive sale.

Endofyear Tax Moves For Your Small Business

End Of Year Tax Moves For Your Small Business Online

Although the IRS instructs brokers not to report constructive sales on client 1099s, according to the Taxpayer Relief Act of 1997, you’re required to disclose and pay taxes on capital gains from that boxed position.

End Of Year Tax Moves For Your Small Business Grants

Constructive sales can also be triggered by certain options strategies, accounts held among different family members, and various other scenarios. Read the IRS Publication 550 to get a more comprehensive understanding of the rules concerning “constructive ownership of stock.” You may be required to report certain gains that have been excluded from your 1099-B.