The tax code allows investors and traders, and indeed all taxpayers, to pay the least amount of tax as is permitted by law. If you invest or trade stocks, bonds, options or other securities, you should be aware of how to best utilize the various accounts you have on your brokerage platform for maximum tax advantage. Consider the following three strategies. 1. If you trade frequently, do so within your IRA or other qualified tax-deferred account. Your money will grow tax-deferred and you won’t be taxed on it until retirement. Unless you hold a position for a long period of time, it is ordinary income anyway. Plus, an added bonus is that you need not keep detailed tax records of your transactions; it is all income when you withdraw it. But be sure you don’t need access to these funds until at least the year you turn age 59 1/2 to avoid paying an additional penalty upon distribution.
2. Positions that you hold in excess of one year can be in accounts that are not IRAs or retirement (tax-deferred). This will allow gains to qualify for long term capital gains tax treatment, generally at a lesser rate. You can also use these accounts for tax-efficient assets such as ETFs, index funds and muni bonds.
3. Before the end of the year, if you have realized capital gains and unrealized capital losses, consider selling some securities in which you have unrealized losses to offset your gains. You can repurchase the same security 30 days later anyway.
Being a smart investor or trader involves more than strategies for when to buy and sell. It also includes keeping an eye to the tax consequences of your portfolio management.