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This Week's Guidepost

“THE TAX MAN COMETH - 2”

1. Last week we reviewed the following spreadsheet planner to help track our progress as we invest through the year. For the fictitious portfolio shown, the bottom line at year’s end was a 48% gain. Not a bad return. However, the title of this guidepost raises the question, where do we stand after the tax man comes and goes? That is the message of this guidepost.

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

2. As investors, we have to pay taxes whenever we realize a profit on the sale of a stock. We don’t pay anything until we sell the stock. It can increase in value (on paper) to any extreme with no impact. It is only when we sell and receive income from the sale that taxes are an issue. If we sell the stock for more than we paid, that is a capital gain. If the price goes down between the buy and the sale, we have a capital loss.

3. There is an important distinction in the eyes of the IRS whether we are “investors” or “traders.” We will discuss that difference next week, but in this guidepost we will all be investors since that applies to most of us. As investors, if we realize a capital gain from a stock that we have held longer than one year, it can be taxed up to 20%. If it is a stock we have traded in less than a year (here’s the bad news), it will be taxed at a short-term capital gains rate of 39.6%! So catch your breath and lets see how the Personal Planner can help us see through this.

4. The worksheet from last week’s guidepost has been modified to reflect the tax consequences for those of us who deal with short-term capital gains. This is the nature of trading in rolling stocks, with stocks held for only a few weeks, or in some cases, a few days. Look at the worksheet carefully.
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

5. Each column is designated by a letter to help explain the planner. We place the ticker symbol under A, the date of purchase in B, and the price of the purchase in C. The commission we pay for the purchase goes in column D, and the total amount we invest in E. This value is the total dollars out-of-pocket. The green shaded portions are cells where we can enter data. Calculations are held in the non-green cells and we will see the results there automatically.

   Column F calculates the number of shares we purchase by subtracting the commission from the total and dividing by the share price. This means the dollar value in E includes the required commission.

6. The next two columns are calculations for planning purposes: G is the price we would have to sell for to just break even (enough gain to pay the commission twice, one for buy & one for sell). In this column, there are no tax consequences since there is no gain or profit from the sale.

7. H is the price required for a gain designated in the cell just above the H. This calculation if different from the worksheet from last week since we must consider the capital gain and the taxes thereon to realize some fixed gain. This value is shaded and can be changed to any % gain for planning purposes. We like to use 10% as a target for quick sells, may get more, may get less.

8. When we realize a gain and sell the stock, the date and price are entered in columns I and J. The commission cost goes into K (this may be the same as the buy commission or different with limit or stop orders). The worksheet then calculates the dollars returned by the sale (sale commission is included in this figure) in L, with the capital gain ($ out less $ in) in M. Now the spreadsheet changes. We place the tax rate in N with the net gain in O. This is what is left of our gain after taxes are removed. Our actual return is then shown in P and annualized in Q, based on the number of days the money was in the market.

9. Here’s what is left of our 48% gain on last weeks example:
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

10. Our 48% gain has plummeted 20 points to 28%! Does this mean we throw our hands in the air and proclaim it a futile struggle? Or do we accept the challenge that while trading rolling stocks is a lot of work, an understanding of market value and timing signals can still make us a lot of money? Your choice!

11. Next week, we will take a careful look at the difference between an investor and a trader, and what the tax implications are.
Point: We are not tax specialist nor tax advisors. You are advised to seek the help of a tax specialist on these issues as they impact your trading success.

The PIP is only for planning purposes and serves that role well. If you are interested in obtaining a copy of the PIP software (Excel spreadsheet), it can be available on the order page for cost, one disk, S&H for $5.00. Stay tuned.

Recently (12/28/99), eminent stock market chartist and guru Don Worden (founder of TC2000) made the following comment: “Every stock has a personality. You should study a stock's personality before you attempt to come to conclusions about its technical strength or weakness... “

To Worden’s observation we add a hearty hurrah! That is the purpose of the Rolling Analysis section. It is not to fix buy and sell triggers. It is to help us understand the personality of tickers we are considering to be rollers. This is but one unique and proprietary feature of Pro-fundity that sets it apart from other rolling stock web sites. Properly utilized, this will provide a market sense and understanding of the nature of what we call “rolling stocks,” increasing their successful use to fatten our wallets.

It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

TC-2000 tutorials are available on the home page.

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