Investors can follow many different strategies to protect their stocks and other assets. Which strategy works best depends on individual goals, risk tolerance, and investment types. Whether you are an experienced investor or just entering the world of stock market trading, an asset protection and tax plan will maximize your investment income. Making the right tax decisions can help you keep more of your earnings.
The following stock tips can help protect your assets and limit your tax liability.
8 Tax-Related Stock Tips for Investors
1. Diversifying to Manage Risk
2. Using Options
4. Stop-Loss Orders
5. Long-Term Capital Gains vs. Short-Term
6. Tax Loss Harvesting
7. Tax-Free Investments
1. Diversifying to Manage Risk
In order to protect your assets, it’s important to plan for the future, and ensure your investments can survive downturns in the stock market. Perhaps you are looking into investing for beginners or are already experienced in buying stocks. The stock tips below can lead you towards more opportunities to keep your profits.
One common way that investors can protect their assets is by diversifying or investing across different assets and securities. The idea is that even if Wall Street is hit with a downturn, and a company’s stock price falls, it does not take all of your money with it. A key stock tip is that spreading your investments can help reduce overall risk for a portfolio of assets due to market volatility. Investors worried about the future of the stock market may also consider the possibility that the stock market will reset or drop prices.
An investor could buy some stocks with low volatility or defensive stocks to offset stocks with higher volatility. Another method is to invest more into government bonds, which is a trade-off as lower risk brings lower rewards. It may also be worthwhile to sell stocks for more liquid cash equivalents or even cash itself. While this method may result in little to no gains, it will not be subject to catastrophic loss that companies would face in a sharp decline of the stock market.
2. Using Options
Options are a way to agree on the buy or sell price for a particular share at a given time in the future. This allows the buyer the right but not the obligation to purchase or sell a stock at a given price. Two key terms here are calls and puts. A call is the right to buy an underlying asset such as a stock at a given strike price. A put is the right to sell at a given price. Options can be used to secure a stock at a more advantageous price or to sell at a profit, depending on the performance of the market. Since the buyer of an option is not obligated to purchase or sell, the underlying asset risk is mitigated. However, if the option expires and is not exercised, the buyer would lose the premium used to purchase it.
In order to qualify for the capital gains rate, shares purchased with an option must be held for one year from the exercise date and one year from the grant date. Also, the price difference between the market value of the underlying security and the strike price creates a taxable event when exercised. Considering taxation is vital because it can lower or destroy your gains if not managed. Long-term options called LEAPS or Long-term Equity Anticipation Securities are another possibility for investors.
Futures are another way to invest for the future and offset the risk associated with volatile markets. In contrast to an option which has no obligation, a future is an agreement to buy or sell at a given price in the future regardless of how the market is performing. This offers investors the ability to lock in a price, but if the market changes, the investor would be obligated to take a loss in some cases. Futures may also offer more agreeable short-term investing ability due to how they are taxed. The downside to futures is that you are obligated to buy from companies or sell goods at the agreed price even if changes in the market make the deal disadvantageous to you. When planning your asset protection, futures can be used to offset the risk of other investments.
4. Stop-Loss Orders
Another way for investors to protect their assets in the stock market is to define limits on when to sell a stock or option when a certain price is reached. This can be used to set upper and lower bound on an investment. If the market turns down or crashes, then the stock would be sold at the lower limit and thus protect from a steep decline.
An important consideration is that when the market closes or trading is halted, the price difference when it reopens can be below the stop price which would be triggered. This can be an issue when a stock momentarily drops below the threshold before increasing. Since the stop order was in place the security would have been sold at the lower price. However, if the stock kept decreasing, your asset would be sold at the stock price when the markets reopened. This could potentially save your investment from continued declines.
5. Long-Term Capital Gains vs Short-Term
As with any investment, it is important to consider the tax implications in order to maximize your gains and offset losses. A key component of this strategy is long-term capital gains. Traders investing in stocks may focus on different time periods, such as intraday trading. Longer investments are given preferential treatment and usually taxed at lower rates than ordinary income and short-term gains, which can range from 10% to 37% depending on the income tax bracket in effect. In contrast, long-term investments gains could be taxed at the lower 0% to 20% and potentially save more money.
To qualify for the long-term capital gains rate, most stocks must be held for over one year before being sold. The sale of stocks creates a taxable event. Some hedge-fund managers, robo advisors, and managers of mutual funds may actively manage shares by selling and buying over short periods of time to try and achieve higher returns. It is important to keep an eye not just on expected profits, but also on how your gains will be taxed.
In contrast to stocks, options can create taxable events when they are exercised and the stocks are bought. In order to qualify for the long-term rate on options, they must be held for one year from the exercise date, as well as an additional year from the grant date. This small caveat can sometimes catch investors, so be sure to consider the possibility when looking at options for long-term investments. The important share tip to remember is that long-term gains are taxed lower than short-term gains.
6. Tax Loss Harvesting
Tax loss harvesting is a method of selling underperforming stocks and assets at a loss and using the deduction to cover the gains of another security or asset. While the deduction is limited in value, it can be applied to higher taxed income such as regular income or short-term gains. The idea is to reduce the higher tax income with a loss while maximizing the long-term capital gains rate from those investments.
Another stock tip is to consider charitable donations or gifting stocks with high gains to offset the taxation involved. This can be incredibly useful to both reduce regular income and possibly reach a lower tax bracket. Due to the complex nature of taxation and investing, it would be best to consult with a tax professional for a fundamental analysis of your asset protection strategy.
7. Tax-Free Investments
Investors concerned about taxes can find more information on tax-free investments here. To summarize, there are many tax-free investments that can help investors minimize the impact of taxes. These can include vehicles such as traditional and Roth Individual Retirement Accounts (IRAs). Investors could also consider Tax-Free Exchange Traded Funds (ETFs). Municipal or “Muni” bonds also offer tax-efficient investing.
In some cases, these bonds can avoid federal, state, and local taxes. There are options to roll investments over into these vehicles in a way that can reinforce your overall portfolio. Due to the complex nature of taxation on investments, it is worthwhile to consult with an advisor about your available tax options.
Dividends and other passive investments offer returns in the form of payouts over given time periods and can be useful for investors looking for monthly income. While dividends can be taxed as ordinary income, qualified dividends may be taxed at long-term capital gain rates.
Another stock tip is to consider investing in real estate investment trusts. For more information, but sure to read about real estate versus stock market investing. Besides the benefit of diversifying your portfolio, these trusts usually must pay out most of their profit in dividends. Depending on your situation, the income from REITs may benefit from an additional 20% deduction for qualified business income under Trump’s recent tax reform.
How Anderson Advisors Can Help
For help planning an optimal tax strategy and asset protection plan, speak with a legal and tax professional from Anderson Advisors. We can help you avoid common mistakes that result in unnecessary losses of income.
To maximize your investments, you should consider how taxes will impact your gains and losses and strategies or stock tips to minimize the effects of market downturns and associated risk. You work hard for your money and investments, and you deserve to maximize your returns. See how our professionals can help reduce your taxes and protect your wealth.
Key Stock Tips
Following these stock tips can help you develop a strategy for minimizing your tax liability. Remember the importance of diversifying. Keeping all of your eggs in one basket could allow a temporary or longer decline in the market to wipe out your investment. Options provide a way to secure investments at relatively lower premiums with the right but not the obligation to purchase or sell the underlying security at a later date. Futures are another investment option for those who wish to lock in future prices. Stop-Loss orders can also be used to define acceptable losses.
Another useful stock tip is to consider the length of your investments. Long-term investing is generally taxed at a lower rate than short-term investing and ordinary income. To maximize gains from investments, consider long-term and other tax-efficient investing strategies. You might also consider gifting profitable stocks to avoid taxes on the gains if they will adversely impact your portfolio. Next, consider passive investment strategies such as looking for dividends. Qualified dividends are taxed at long-term gain rates but can provide monthly income. One might also be able to benefit from REITs and associated tax benefits under the Tax Cuts and Jobs Act that went into effect early 2018.
Reach out to Anderson Advisors today for assistance with your specific financial situation. We’ll help you develop a customized wealth planning blueprint so you can protect your financial assets and reduce the tax liability of your stock market investments.
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