Released on: March 19, 2008, 8:02 pm

Press Release Author: Manage Invest

Industry: Financial

Press Release Summary: Investors often pay too much capital gains tax. This article
explains why this happens and how it can be avoided.

Press Release Body: As you 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 important 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 portfolio 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.

For example, you could allocate all of the units as sold from the first parcel
above, which would result in an income of $13,000.00 and a capital gain of (($13.00
- $10.00) x 1,000 = ) $3,000.00. In this case you would pay tax on $3,000.00.

A better alternative may 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.

Manage InvestT , the most comprehensive investment portfolio management solution
available, gives you the control to decide what you sell so that you achieve the
best results possible.


Web Site: http://www.manageinvest.com

Contact Details: Manage Invest
(www.manageinvest.com)

Melbourne
Australia