First a bit of an explanation...
As you probably already know capital gain is the difference between
the cost base of an asset and the price for which it is sold. What may
not be so obvious is that the way in which capital gains are
calculated can make a very big difference in how much tax you need to
pay.
Before continuing the explanation it is im****tant to introduce the
concept of 'parcels'. A parcel of stocks is a group of stocks in a
given company purchased on a specific date at a specific price. For
example, a purchase of 1,500 XYZ stocks for $10.00 each on 22nd of
February 2008 would be one parcel. The purchase of 1,250 XYZ stocks
for $14.00 each on the 4th of March 2008 would be another parcel.
These two parcels would then make up your total holding in XYZ: 2,750
stocks at a total cost of $32,500.00 making for an average cost base
of $11.82.
The vast majority of investment ****tfolio management tools simply
contain the last of the figures. They tell you that you own 2,750 XYZ
stocks with an average cost base of $11.82. Unfortunately, lumping
parcels together in this manner can lead you to paying too much tax
when the shares are sold.
For example, if you were selling 1,000 XYZ stocks for $13.00 each then
systems which lump the parcels together will simply record an income
of ($13.00 x 1,000 = ) $13,000.00, with a capital gain of (($13.00 -
$11.82) x 1,000 = ) $1,181.82. You would then need to pay tax on
$1,181.82.
However, in most countries you can choose which of the parcels you
wish to sell. Tracking parcels separately enables you to make that
choice.
One choice could be to allocate all of these units as sold from the
second parcel which would also result in an income of $13,000.00 and a
capital loss of (($13.00 - $14.00) x 1,000 = ) - $1,000.00. In this
case there is no tax to pay and the loss may be used to decrease tax
liability.
Same sale, same income, very different after-tax results! Obviously
there are some other factors at play. The amount of time for which you
have held the various parcels can make the difference even more
pronounced. However, the main point is this: you either have control
over the tax consequences of a sale or you do not.
Why the disregard for this im****tant issue? Do the ****tfolio
management products / spreadsheets used by readers of this group
afford users the proper choice when selling shares?
There are a couple of Australian products, Manage Invest and MySF
Manager that split parcels and allow the choice as detailed above. Are
there any others out there that have this capability?
|
