Under a new tax law, securities bought after 2000 and held for more than five years qualify for an 18% capital gains tax. What about assets bought before 2001? The new tax law gives you the chance to make a “deemed sale-and-repurchase” on your 2001 tax return.
This provisions allows you to alter the purchase date and qualify for the 18% rate. However, taxes will be due on any paper profits.
Suppose you bought $10,000 worth of Citigroup stock several years ago. On January 2, 2001, that stock was worth $15,000. When you file your income tax return for 2001 next year, you can make this special election. You’d owe tax on a $5,000 long-term gain, at 20% rate, so you’d have to pay $1,000 in tax.
This election will give you a new basis in the stock ($15,000) and a new starting date (January 2, 2001). If you hold the stock for another five years, any gain above $15,000 will qualify for the 18% rate.
Another option is to actually sell the stock and buy it back. That would mean paying transaction costs but those costs might be modest, if you trade online through a discount broker. You also can sell any securities you hold at a loss, to offset the taxable gains, and buy other securities to start the five-year clock.
