From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: How to Protect Capital Gains?
Reply-To: ask@cblph.att.com
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Distribution: usa
Date: Fri, 20 Nov 1992 20:40:47 GMT

In article <m8z1x_=@rpi.edu> floydb@rpi.edu writes:
>In article <1992Nov20.152817.28330@netcom.com> girisha@netcom.com (Girish Andalkar) writes:
>>For a change I will have a good deal of Capital Gains for this
>>year.  I prefer to take the gains in next year for tax purposes.
>>What are the workable sceams, solutions that "gaurentee" that
>>the paper profits do not evaporate.  Please elaborate in detail
>>the pros and cons.

Yes -- there are ways to guarantee the paper profit will not
evaporate.  But you later say you still want to participate in any
new profits the stock may undergo -- that sure makes it more
difficult:

>>I am aware (very little) of "Selling Short" what you own to make
>>sure that the gains do not disappear.  But I do not want to loose
>>(greedy) further appreciation that is likely.  Also, if I sell
>>it short now, the money I will get now, will have to be 
>>accounted for somehow for taxes.  As you can see, I am all confused.
>>
>>I am willing to spend little money if "Options" is a workable
>>alternative.  Again, I do not know much about options.
>>
>>Please help.  I am sure many of our friends have similar problems.
>
>Presuming your capital gains are on individual stocks you have at
>least three choices:
> 
>1) Short selling stock that can be covered by stock you already
>   own. You realize a profit now and retain your stock. If the 
>   stocks go down your potential profit on the short-sale increases
>   as your capital gain on the retained stock decreases. If you
>   have the choice of buying stock on margin, you may be able to
>   short sell more stock than you own and incur the increased risk
>   and increased current-year profit. This is not a tax-avoidance
>   choice.

This is often called "selling short against the box."

You basically put the X shares you now own "in a box" where they
won't be touched until next year.

The you sell short a "different" X number of shares in the same
company and take in the cash right now.

Next year you close out both your original long transaction as well
as this new short transaction.  Those two transactions will cancel
each other out less commission costs, so whether the stock sinks
real low or whether the price shoot way way up, you will not be
affected.

Most brokers will accept orders to sell short against the box, but
they might charge a small fee to put your long shares into
"safekeeping" - the box I described.

If you actually hold the shares yourself, there's no worry about a
fee, or if you have accounts with two brokers you can do the same.
Of course, in these cases, you will have to have sufficient
collateral for your short sale.

The option strategies described allow you to hedge you profits a bit,
and maybe pull in a bit more cash;  but they are not a guarantee of
doing so, and can produce a loss, for that matter.

>2) Similarly, you can write covered calls for the quantity of stock
>   you own. If the stock goes down your options won't be called and
>   you keep the premium. If the stock goes up you may be called before
>   the end of the year and not avoid capital gains taxes this year.
>
>3) You could buy puts. You can't get called on the options and you
>   don't realize any profit this year from the transaction. You
>   lock in the sale price even if the stock goes down. If the stock
>   goes up, you could sell the put options at a loss or you could
>   let them expire worthless. If you don't want to loose much on
>   the put options and you don't think the stock will go up too
>   much in the next two months then you could buy puts in the money
>   at a strike price six months out (April/May). With the stock
>   price staying the same time-value will have little impact and
>   intrinsic value will remain constant, you might loose 10% to time
>   plus commissions.
>
>good luck
>
>barry
>


-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus
Newsgroups: misc.invest