The 3 biggest implications of new tax laws in 2013

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By Emma Underwood

There are changes on the 2013 1040 form that will affect the amount of federal income tax many people pay this year. Just about every taxpayer will be affected one way or another by these changes to the tax codes.

What specifically are those changes, and who will be affected the most by each individual change?

1. Payroll taxes:

Most working people took home less money in January 2013 than they did in December 2012, even if they were earning the same amount of money. That's because Congress allowed the payroll tax holiday to expire.

The Social Security tax withdrawn from paychecks has traditionally been 6.2 percent. In December 2010, however, Congress enacted a two percent payroll deduction. There is some political controversy over whether or not this cut was intended to be temporary. Most Democrats argue that the payroll reduction was a temporary measure; some Republicans argue otherwise. Be that as it may, the entire 6.2 percent is now being withheld, and the Social Security wage ceiling has been raised to $113,700.

Additionally, high earners will see a raise in the amount of Medicare tax withheld from their paychecks. For people earning more than $200,000 a year, an additional 0.9 percent will be withheld.

Finally, self-employed individuals who have been paying a self-employment tax of 10.4 percent since 2010 will see their self-employment taxes rise back up to 12.4 percent in 2013.

2. Higher capital gains taxes for higher earners:

Gains from the sale of assets held for one year or less will no longer qualify for long-term capital gains tax treatment.

For single individuals who earn $400,000 a year or more, and for married couples filing jointly who earn $450,000 a year or more, capital gains taxes will now be 20 percent instead of 15 percent.

This may have a visible effect on the purchases and sales of stocks and other financial assets. Higher taxes means less money to invest in the stock market and other investment opportunities, which in turn means less opportunity to benefit from asset appreciation.

Additionally, households with adjusted gross incomes of $200,000 (single filer) or $250,000 (joint filer) are now subject to the 3.8 percent surtax that was passed in 2010 as part of the new health care legislation. This could conceivably drive capital gains taxes for some individuals up to a rate of 23.8 percent.

The new tax bracket for individuals earning $400,000 or more, and couples filing jointly earning $450,000 or more, is now 39.6 percent, up from 35 percent. However, this will not affect people filing their 2012 taxes.

3. Changes in deductions and exemptions:

Congress also enacted a great many changes in the ways that deductions operate. People at the high end of the earning spectrum will no longer be allowed to take all their itemized deductions. Those cut off points are $250,000 for single individuals, $275,000 for individuals filing as heads of households, and $300,000 for married couples filing jointly.

The itemized deductions that are subject to this phase-out include:

• Charitable contributions
• Job-related expenses
• Other taxes
• Interest (but not investment interest)

The rules for calculating the new rates for itemized deductions as they are being phased out are very complicated. Higher income earners will also be hit by a reduction in the personal exemption to which they hitherto have been entitled.

About the author: Emma Underwood is an economist and guest author at How Do I Become A..., where she contributed to the online How Do I Become An Economist guide.

5 useful facts about the taxation system in the UK

US-PDGov

The majority of taxes assessed in the UK are at the national level. Taxes paid that are paid at a regional or local level include property taxes. The tax year for citizens in the UK are from April 6 of the current year to April 5 of the following year. Five facts may help to explain how the taxation system in the UK is set up for residents.

Assessment basis

Residents of the UK are taxed on capital gains and income they earn in and out of the country. The UK requires most residents to file a tax return based on a self-assessment. The only exception is for anyone who only has savings income and receives regular employment income. Individuals who are employed will be under a pay as you earn system. This is where taxes are withheld by the employer. Anyone who is self-employed will need to file a yearly tax return.

Income tax

Individuals who reside in the UK will be taxed on all income that is taxable. However, they will have a few allowances that are tax free based on their age and marital status. Certain allowable deductions are available that count against taxable income. This includes contributions to a pension and any donations to charity. If individuals or couples are over 65, then an additional tax free allowance is available.

Investment income

The majority of investment income earned by UK residents is taxable. This income will be added to all other income when an individual's tax liability is calculated. The tax rate applied to investment income will vary based on type and the applicable tax band. Tax bands are determined from the type of income and how it is earned, such as non-dividend savings and dividends.

Capital gains

This is a tax that applies when an individual sees a gain received over the annualized exception limit of the UK. Current capital gains rates are set at 18 percent and 28 percent as of June 2010. The actual rate that is applied is based on an individual's total taxable income. The higher rate will apply to a resident if their income and gains are above the base limit for the 2012/2013 tax year.

Inheritance tax

Individuals who receive gifts or assets from a family deceased family member will be assessed the UK inheritance tax. This is tax on the total value of an inheritance received by a beneficiary and will be set at a rate of 40 percent. However, the first 325,000 pounds are subject to this tax until 2015. If there is a sum of the estate of a deceased person left to charity, then a 36 percent tax rate will apply. The transfer of gifts between spouses will typically be exempt from the inheritance tax.

Additional information

The value added tax in the UK is added to the price paid for goods and services and increased on January 4, 2011 to 20 percent. Individuals who have rental income will have it applied to their income tax.

About the author: Sally is a content writer for Francis Clark Tax Consultants, a business based in South West England who provide a UK tax advice for their clients, visit FCTC.co.uk to find out more about their tax services.

Why a step-up in cost basis can affect taxes

A step up in cost basis can dramatically affect taxes because it amounts to an increase in the value of wealth passed between deceased and living persons. The step up in cost basis regulation is contained within Title 26, Subtitle A, Chapter 1 of the U.S. code alternatively named the I.R.S. tax code. This regulation requires property to be adjusted to fair market value following the death of the owner, but is capped at no more than $1.3 million in so far as the tax code permits.

Major disadvantages of step ups in cost basis is the amount of wealth that is taxed either via inheritance tax, or estate tax. An advantage however, is that realized capital gains can shrink lowering the resultant capital gains tax for the beneficiary responsible for liquidating the property.  Even with a reduction in capital gains tax however, the step up in cost basis ends up making an estate and inheritance cost more. Since inheritance and estates are sometimes taxed, the affect can still increase the amount of taxes due.

The step up in cost basis is an important aspect of estate tax planning and individual tax strategy. Being aware of how it can affect taxes and the methods by which it may be reduced or beneficial is key to making the most of this financial requirement. Estate planning is particularly relevant to step ups in cost basis because the financial instrument in which wealth is held and through which it is transferred affects how the property will be taxed regardless of the step up in tax basis.

Several financial instruments may be utilized to bypass immediate estate, capital gains and inheritance taxes. Examples of these estate planning tools include family limited partnerships, various forms of trusts, and gifting.  Although not all financial instruments avoid taxation, they can defer taxation until a suitable tax strategy has been developed. When estates are valued below a certain amount, neither the estate or inheritance tax may be applicable making a split estate an option to consider.

Depending on which state a beneficiary or beneficiaries live, the step up in cost basis may affect taxes differently. For example, not all U.S. states have an inheritance tax. Inheritance and estate tax may in some cases be avoided when held in joint tenancy. Since two or more persons own the property, the property does not transfer and is therefore not an inheritance per se because it is already owned.

As tax regulations are updated and changed, the step up basis on assets can affect taxes differently. For example, in 2010 the estate tax rules are set to expire thereafter reinstating the taxation of estate value. Specific taxes to be aware of when it comes to step ups in cost basis are capital gains tax, inheritance and estate tax, in addition to value limits and caps on transactions relating to such. These taxes can reduce the value of an estate significantly. Navigating the tax strategy and financial options with a skilled and knowledgeable financial professional may be of great value in some circumstances.

Sources: 

1. http://bit.ly/c2ncMG (Cornell University Law School)
2. http://bit.ly/cRsFXK (Estate Find Law)
3. http://bit.ly/c0XnQo (Bankrate.com)
4. http://bit.ly/auDihg (Avoid probate.com)

Wash Sales and Worthless Stock

Wash sales are a term given to the repurchase of securities such as stocks within 30 days prior to and following the selling of securities at a capital loss i.e. at a price lower than the price purchased. 

Such sales may be implemented to avoid 'worthless' securities transactions despite the wash sale rule. The wash sale rule is implemented by the U.S. Internal Revenue Service that disallows tax benefits usually afforded to financial losses incurred through capital loss on investments.

The tax benefits lost due to a wash sale may be regained at a later time through a basis adjustment in which the loss on the sale of a financial instrument is added to the purchase price of the wash purchase. (www.fairmark.com) This is an important adjustment to note as overlooking it within a given tax year could lead to an over reporting of capital gains.

Calculating disadvantages of the wash sale rule

If the tax savings loss is greater than the potential capital gain incurred through an upward price movement following a wash sale, then the wash sale may not be profitable. In other words, for a wash sale to be financially prudent the repurchasing of securities should ideally lead to a profit greater than the tax savings incurred through a tax deduction on the loss of sale. To calculate the potential worth of a wash sale following specific steps may be helpful.

• Identify tax bracket

• Estimate adjusted gross income after the sale of securities

• Calculate tax savings using adjusted gross income estimate and tax bracket 

• Forecast potential capital gain on wash sale 

• Subtract estimated tax savings from forecasted capital gain

Securities affected and not affected by the wash sale rule

Wash sales do not apply to every exchange of securities within a 60 day period. In the case of certain financial instruments, the repurchase of securities either 30 days before or after a sale are not considered wash sales. Furthermore, according to the IRS, wash sales do not apply to the following items (www.irs.gov)

Financial Instruments not affected by the wash sale rule:

•Foreign exchange purchases and repurchases

•Futures contracts

•Non-equity options

•Dealer equity, or securities futures contracts

Financial Instruments affected by the wash sale rule:

• Purchase and sale of stocks through an individual retirement account (IRA)

• Sale of stocks through an options contract

• Purchase of similar types of securities ex-stocks of two similar oil companies

•Options contracts involving repurchase of the same stock

Wash sale tips

When entering into a wash sale a few considerations may be useful in one's financial management strategy. A few of those tips are provided below with the purpose of clarifying the potential benefits and disadvantages of wash sales.

• Time of year: If the wash sale takes place early in the fiscal year, the cost basis adjustment may offset the tax loss if a cost adjusted capital gain of equal proportion to the capital loss is incurred. Additionally, since wash sales only apply within a 60 time period, adjusting securities purchases outside of this time frame may be beneficial.

• Type of security: In the case FOREX and futures securities transactions the wash sale rule may not have an impact in which case such purchases and sales may have less tax implications

• Size of transaction: Depending on the size of the transaction the wash sale rule may incur relatively little or larger financial impact. For example, 1) a forgone capital loss that may have lowered tax filing bracket, 2) a large enough transaction in which the tax benefit loss is significant

• Investment & Tax strategy: Incorporating the potential for wash sales into one's investment and tax strategies can be useful in maximizing gains and minimizing losses. Considering the potential implications of purchases may lead to a more developed approach.

Summary

The wash sale rule is a part of the U.S. federal tax code and disallows tax benefits for the loss of various securities such as stocks and option contracts in the event an additional purchase of that or a similar security takes place within a 60 day time frame. Certain limitations exist for this rule including the 1) basis adjustment calculation and 2) purchase of securities not included in the wash sale rule. 

Calculating the potential loss from a wash sale involves the estimation of adjusted gross income, tax bracket, potential tax savings and capital gains and losses. Incorporating and understanding the rules of the wash sale into one's overall investment and tax strategy can be a useful in one's individual financial planning.

Sources:

1. http://www.irs.gov/publications/p3991/ch01.html
2. http://www.fairmark.com/capgain/wash/ws101.htm
3. http://www.irs.gov/pub/irs-pdf/p550.pdf

Tax Implications of Investing in Precious Metals

The tax implications of investing in precious metals can be assessed in several ways, each of which can have an impact on the net-profit an investment makes. These ways include the holding or sale of precious metals as 1) tangible property and intangible property, 2) capital gains, and 3) personal business.

This article will discuss these means by which precious metals can be taxed, the situations in which the tax applies, and the levels at which each method of taxed is implemented. There are also methods and financial instruments that may avoid or reduce taxation of precious metals, back room estate sales excluded. These techniques will be elaborated upon in the 4th part of this article.

Taxation of tangible and intangible property

Precious metals are considered tangible property rather than real property. Thus in some cases, the ownership of precious metals such as gold, platinum, titanium, and silver may or may not carry property related tax. The U.S. Federal government does not tax ownership of tangible property in the form of precious metals until they are sold and/or income is received in relation to them. However, some U.S. States such as Georgia, do tax ownership of personal precious metals. Some States that do not tax ownership of precious metals are Delaware, Pennsylvania, and Hawaii,

Taxation of capital gains

Proceeds from the sales of precious metals are taxable as income when those proceeds yield a profit from the original price after qualified cost basis adjustment. Not only are the sale of precious metals made for investment taxable as a capital gain on intangible property, they may also be taxable as income from sale of collectible assets, which for all but the lowest income tax bracket is equal to or higher than the maximum long term capital gains tax. This means that sales of Gold funds could end up taking 28% off your capital gains instead of 15%.

Taxation through 'pass through' business

Sole proprietorships, S-Corporations and Partnerships all receive flow through income on individual tax returns. This means end of tax year retained income from a gold collectibles dealer structured as sole proprietor or S-Corporation would be passed through onto the individual owners' 1040 tax returns as income.

This income is then subject to normal deductions and exemptions and then taxed at the income tax bracket rate in which the individuals' taxable income validates. Additionally, a minority portion of U.S. States assess tax on business inventories. In such cases the inventory tax is assessed via that State's taxation method.

Tax free, reduced, and deferred precious metals

There are a few ways to avoid or defer tangible property tax, tax on the sale of precious metals and income related to such. These methods include 1) conversion, 2) reallocation 3) exchange and 4) cost basis adjustment and expensing.

• Conversion

This means precious metals crafted into items such as tea-pots, jewelry, silverware etc. qualify as personal adornments and household items thus avoid being taxed as personal property even in States that do tax tangible property.

• Reallocation

The placement of intangible precious metal assets such a precious metals fund, in a tax-deferred instrument such as an I.R.A., or a tax free instrument such as a foreign company trust. When these assets are bought and sold they then may either defer income tax or avoid taxation so long as specific income is not brought into the United States. For example, a precious metals mining company that issues shares on a foreign exchange and is traded on that exchange through a foreign company trust, will not be taxed in the U.S. until that income is received within the U.S.' taxable jurisdiction.

• Exchange

Similar to barter where what is traded cannot be taxed as a sale because nothing is sold. Barter can be used to exchange for an item of higher value or higher potential appreciation thereby deferring taxation until that new item is sold.

• Expense accounting

Recoding the purchase of precious metals as an expense rather than a credit to a cash account may make a lower taxable income possible at the end of the tax year. This technique requires the use of a third party source of financing such as a private lender. Provided the source of financing has a lower cost in regard to the profit made from both the sale of the precious metal and the tax on such, then this method may be advantageous.

For example, company A purchases $10K of gold collectible coins with financing from Company B at 4%. After the tax year ends, the business sells the gold for a profit of 10% and pays off the loan half way through the loan's term. The loan ends up costing 2% due to early payoff, the profit becomes 8% and the tax on the gold's sale for that year is 0%, and annual income tax is reduced due to the financing expense.

Taxes on the Exchange of Stocks

Taxes on the exchange of stock are only incurred if 1) the exchange leads to positive gains and 2) the transaction(s) do not take place within tax deferred financial instruments such as a Roth IRA. When earnings are made from the exchange of stock they are called capital gains and come in two types short term and long term. Capital gains are reported on an IRS form 1040, schedule D. There are several rules, and techniques that are relevant to and have the potential to lower taxation of profits arising from the sale of stock.

Short-term capital gains

Short-term capital gains are acquired through positive exchange of stock held less than one year in time. The taxation rate for short-term capital gains is the same as ordinary income taxation rates. For example, if one's total taxable income inclusive of short-term capital gains is between $30,650-$74.200, then income over $30,650 including the capital gains is taxable at 25% . Short -erm capital gains not held and/or exchanged in a tax deferred financial instrument are reported in part 1 of schedule D. This form is available at www.irs.gov.

Long-term capital gains

Long-term capital gains are gains made from the sale of stocks and/or other assets such as property that have been owned for longer than one year. The taxation of long term capital gains is lower than short term capital gains and is determined by completing part II of a schedule D in addition to part III of schedule D and the capital gains worksheet contained in the IRS 1040 instruction manual. The current tax rates for individually held long term stock capital gains as of the writing of this article is 5% for tax filers under the 25% taxable income bracket and 15% for taxable incomes at or above 25%.

Stock tax tips

There are several ways to legally avoid taxation of capital gains i.e. taxes on the exchange of stock. While these methods may not allow free and immediate access to the funds, they may serve as a viable tax hedge in instances where annual income is too high to make net worth and or leveraging outside of tax deferred financial instruments too costly in terms of taxation. It is also important to be aware of any special stipulations or rules within the tax code that may be helpful.

• Stock Transfers: Stocks transferred but not sold, from one account to another can allow the sale of stock in the new account to be taxed at a lower rate if the individual or organization receiving the stock is a child, has lower taxable income or is a non-profit organization.

• Donated Stocks: Transfers may also be considered tax deductible charitable contributions in the case of stock transfers to non-profit organizations or trusts.

• Wash Sales: If stocks are traded more than once within a 30 day period and at least one of the sales resulted in a capital loss, that loss is not deductible as a capital loss and is known as a "wash sale".

• Non-Taxable Distributions: For stocks that also pay special dividends or qualify for dividends to be distributed as non taxable, capital gains can be offset by the cost of stocks in so much as the non taxable distributions have a value equal to or less than the original cost of stock.

• Retirement Accounts: Exchange of stock through a retirement account can be tax deferred meaning any capital gains acquired through the account will not be taxable until withdrawal of that income.

• Irrevocable Trusts: If a stock owner gives stocks to trust before the stock increases in value then 1) one's taxable income will be lowered by the amount of the trust donation if the trust is non-taxable 2) the stocks within the trust may be tax free after sale, if they are less than the estate tax minimum taxable amount and 3) Dividend income earned through the stocks in the trust may also avoid taxation.

• Capital Losses: In cases where net taxable income is just over a new tax bracket for a given year, it may be advantageous to sell at a capital loss if one's investments in tax deferred instruments such as deductible IRA's have been maxed out and if the capital loss is likely to be unavoidable. This in a sense lowers the amount of the capital loss via tax savings between approximately 10%-33% on each dollar of capital loss provided a taxable income exists.

Taxation of capital gains can be thought of as quite straightforward in comparison to some other taxation concerns. Generally, short-term capital gains are not as cost effective as long-term capital gains and in the case of investments sold through a retirement or tax deferred financial vehicle. Some exchanges of stock, such as "wash sales" may not be deductible and capital losses may be offset through certain non -taxable dividend distributions. Other ways to reduce tax on stocks is to transfer ownership of them to a child or non-profit organization before the exchange.

Sources:

1. http://www.irs.gov/publications/p550/ch01.html#d0e4968
2. http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm
3. http://www.msnbc.msn.com/id/7070269/
4. http://www.inc.com/magazine/19970901/1322.html

An Overview of Capital Gains Tax Rules

The Capital gains tax is the government portion of profit(s) made from the sale of assets in the form of tax. Depending on how high one's capital gains are for a given fiscal year, capital gains tax can vary from between 0%-28% in the United States.

If capital losses are incurred on the sale of assets, those losses if combined with capital gains to be a net loss, can be deducted from total income possibly placing the tax filer in a lower tax bracket. This article will illustrate 1) the concept of the capital gains tax, 2) where to find information about filing capital gains tax and 3) tips that may be helpful when preparing for capital gains or losses.

What Capital Gains Tax is

In addition to being a tax on the profitable sales of assets, capital gains tax also applies to investments. Consequently, profitable sales of stocks, commodities, mutual funds, real estate, classic automobiles, bonds, collectibles etc. are all considered capital gains when sold from a non-commercial entity, i.e. individually and not through a business.

The U.S. Internal Revenue Service classifies assets and investments that qualify for capital gains and losses slightly differently. For example, losses on personal property such as non-investment vehicles or homes are ineligible for a capital loss deduction according to the IRS. Additionally, there is a limit of $1500-$3000 to the capital loss deduction

Information on calculating and filing capital gains tax

Assets and/or investments that are held for one year or longer qualify for long-term capital gains tax whereas assets and investments held for less than a year are considered short term capital gains. (www.irs.gov). Short-term capital gains are legally subject to higher taxation rates than longer term capital gains.

Each year tax code may change through adjustments to tax code so tax rates can vary. Generally, the exact tax can be calculated using a capital gains tax calculator, and/or referring to IRS Publication 550 "Investment income and expenses (including capital gains and losses)"

After completing an IRS Schedule D and form 1040, one should be left with the correct amount of capital gains and/or loss to which tax, if any is applied. It is not until this value is calculated that a capital gains tax assessment can be made. Generally speaking, the higher the capital gains, the larger the capital gains tax will be, especially if the gain is over $28,000.00 (IRS Publication 550)

To illustrate, if Mr. Jones earns $50,000 in capital gains, and all these capital gains where from short-term holdings, that income will be added to his additional income if any on his form 1040 unless he invests through a business. If his gross adjusted income is above $75,000 his capital gains will be taxed at the highest amount because the capital gains were short term holdings, thus subject to higher taxation up to 28%, and his income tax bracket is at the 28% level.

Tips and techniques for recording capital gains and losses

Preparing for capital gains tax can be a year long process, accurately recording costs, profits, losses and investments bought and sold can assist in cross referencing and recording proper numbers on the IRS forms. Additionally, if a form 1099 is sent by a broker, the values on that form can be compared with personal records.

Additional examples of sales records include checks with memos, title transfers, transfer of deed and certificates of ownership. In the case of Roth Individual Retirement Accounts, capital gains earned through investment through the Roth IRA are tax deferred and therefore do not need to be recorded in a tax filing until withdrawal. The following tips may be helpful with working with capital gains.

• Read the tax code provided by the Internal Revenue Service: This helps identify what capital gains levels are taxable at which rate and may help lower tax.

• Properly deduct investment losses from capital gains so as to avoid over taxation

• Consider investing through a retirement account to avoid annual schedule D filings and capital gains tax before annuity or IRA distribution.

• If investing through a retirement account, capital gains within a Roth IRA may be non-taxable if the proper withdrawal criteria are met. (bankrate.com)

•If investing through a foreign owned corporate trust, capital gains tax rules may be lower.

•Investments through insurance policies may avoid capital gains tax through loans made from the policy and/or if the total cash value of the loan amounts to less than the total cost of financing the policy (babyboomercaretaker.com) Also, in the event of death or a claim on life insurance, the value of the policy is often not taxable.

Summary

Capital gains are a way for the government to tax income from the profitable sale of investments and assets. The tax rate for capital gains varies based on the 1) tax code for any given year 3) amount of capital gains in relation to individual income and 3) the financial vehicle and/or entity through which capital gains are earned. If capital gains are taxable in the United States, the Internal revenue service publication 550, form 1040 and schedule D are essential documents that may be referred to and/or completed in properly filing capital gains with the Department of the Treasury's I.R.S.

Sources:


1. http://www.irs.gov/newsroom/article/0,id=106799,00.html
2. http://www.irs.gov/pub/irs-pdf/p550.pdf
3. http://www.moneychimp.com/features/capgain.htm
4. http://www.bankrate.com/brm/news/drdon/20011129a.asp
5. http://taxes.about.com/od/capitalgains/a/CapitalGainsTax.htm
6. http://tinyurl.com/663scfz
7. http://www.moneychimp.com/features/tax_brackets.htm

Stock Option Collar Strategy: How to Delay Paying the Taxman

Using the collar strategy to avoid paying capital gains taxes can be an effective strategy depending on the time horizon of the stock options, the particular stock options chosen and the performance of the underlying stock. In other words, so long as the investor holds onto the appropriate long position, and 'collars' by writing call options and purchasing put options with expiration after the end of the fiscal year, the strategy could postpone paying of income taxes to a subsequent year.

To illustrate further, since the collar strategy can yield profit on the difference between the cost of the put option and the call premium, the possible exercising of the options is of importance. Even if the expiration date is past the end of tax year, the put option could be exercise before then potentially leading to taxable income. Moreover, a positive difference incurred from an early closing of a call option and exercising of the put may yield taxable income.

To effectively employ a collar, a few important steps can be considered.1)) Hold a long position that is estimated to remain flat or decline significantly in share price 2) ensure the company is also tradable through stock options and 3) study the options available in terms of price, premium and expiration date. All being well, the selection of the collar strategy will be both financial fruitful and a tax deferral technique.

An example of collar options strategy to avoid paying taxes is as follows. Investor Y owns 1000 shares of ABC corporation currently priced at $86.00/share. ABC corporation is currently priced above the purchase price paid by the investor. To avoid selling and paying capital gains taxes, investor Y writes 10 call options for ABC corporation with a strike price of $95.00 and purchases 10 put options for the same company with a strike price of $75.00.

If the price of ABC rises, the underlying stock value will yield a non-taxable gain if it is not sold before the end of the tax year. However, the premium of the call option will be lost if the stock price rises above the strike price in addition to the costs of the put option. The difference between the underlying stock gain and the cost of the options will therefore determine any profit or loss. In the case of a capital loss, this amount may be deductible from taxable income if the options are exercised before the end of the tax year.

Should the price of the underlying stock remain flat or decline below the purchase price of the underlying stock, and the put option's strike price, the premium from the call option plus the gain from the difference of the put option's strike price minus the current price after costs can serve as a tax hedge against holding onto the underlying position to postpone capital gains tax.