Tax Tips for Investors

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1. Capital Losses and Capital Loss Carryovers:  The $3,000 capital loss limitation refers to how much net capital loss can offset ordinary income on your tax return. Ordinary income includes salary, self-employment activities, alimony, interest, dividends and etc ($1,500 for married filing separate status). The excess capital losses can carryover to future tax years to offset future capital gains.

2. Beneficial Tax Treatment of Day Traders: If you are properly classified as a securities trader for federal income tax purposes. Then you are considered to be in business of trading securities for living, and therefore you will have two available tax benefits: (1) Exempt from $3,000 annual limitation on deductible capital losses. That means you can fully deduct all the losses that would otherwise be subject to the $3,000 limitation. (2) You are also exempt from the rule of Wash Sale.

However, in order to be classified as securities trader status, you have to make mark-to-market election. This election should be done by a CPA or a qualified person.

3. Deductions for Gamblers: You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A, as a miscellaneous itemized deduction that is not subject to the 2% limit. On some cases, taxpayer can claim to be a professional gambler for federal income tax purposes. A professional gambler reports his/her winnings and business expenses on Schedule C of Form 1040.

4. Tax-Deferred Programs: Making your purchases of securities through a tax-deferred account (IRA or SEP) can save taxpayer money. You are not taxed on capital gains until you withdraw the money.

5.  Treasury Inflation-Protected Securities (TIPS): TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation. For example,

     - Inflationary Environment:  If you buy a face value of $20,000 5-year TIPS that pays 1% stated annual interest. Assuming you will hold the TIPS to maturity, and inflation is at an average of 7% annually, then your annual rate of return would be about 8%.

     -  Deflationary Environment:   If you buy a face value of $20,000 5-year TIPS that pays 1% stated annual interest. Assuming you will hold the TIPS to maturity, and deflation is at an average of 3% annually. Your annual interest payments are reduced, but you still get the full $20,000 face value back at maturity.