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Taming Your Trading Taxes


If you, like me, are just now doing your taxes, chances are you'll soon be crying for help. And if you're anything like Tom Lee, who made over 300 stock trades last year, you may be crying uncle. Lee, a Chicago computer consultant, did lots of day-trading in 2000. But like so many others, when it came to keeping records, he confesses, "I wasn't very meticulous."

Trading and taxes go together like cocktails and hangovers. Happily, despite the bear-market sobriety now prevailing at so many Web operations, a few sites aimed at individual investors keep serving up interactive cures for that killer headache known to the Internal Revenue Service as Schedule D.

My absolute No. 1 pick in this category remains a low-profile place called GainsKeeper. You can find it at www.gainskeeper.com. Starting out a year ago with a high-end stock-tracking tool, the site has evolved to offer better coverage of mutual funds and short sales, easier data entry, and capital-gains reports ready to clip right on a Schedule D. Most impressive is the site's latest feature, GainsAdvisor.

Launched in March, GainsAdvisor promises to size up your portfolio and tell you which holdings you can sell to get the most cash while paying the least tax. Underlying this analysis is the site's compulsive, automatic tracking of the cost basis for each of your shares--and even fractional shares--adjusted for splits, mergers, spin-offs, and other odd dividends. As Shawn Ward, a GainsKeeper product manager and Fidelity Investments veteran, said: "Without cost basis, you really can't give good selling advice."

To test the new tool, I created a hypothetical portfolio, stuffed with lots of long-term capital gains--and short-term losses--on such stocks as Amazon.com (AMZN), Brocade (BRCD), and Yahoo! (YHOO) In Yahoo, for instance, I had two 100-share lots, one bought in September at $100 a share and another in March at $15. Dumping the first lot to realize a huge loss looks like a neat way to cut taxes. But selling it within 30 days of the second lot's purchase creates what the IRS calls a "wash sale," invalidating the tax benefit. GainsAdvisor alerted me via a little red flag, then told me how many days I needed to wait to get the loss.

SIMULATED. To pinpoint better sales, GainsAdvisor gives each lot of stock or fund in your portfolio a "sell grade." A grade of 1.0 is neutral for tax purposes. The further over (or under) 1.0 it is, the more (or less) helpful to your tax position. Ranking my holdings this way, GainsAdvisor suggested I sell 100 Amazon shares acquired in late 1999 at $110. It then simulated a sale's effects. Given a 31% tax rate, it calculated $1,036 in cash proceeds, plus a tax loss of $9,992. Using the $3,000 maximum loss allowed each year, I could cut my tax bill by $930 and carry forward for future use the leftover $6,992 loss. Caution: If you sell by specific lots, get your broker's written confirmation that you ordered the sale of specific shares bought on a specific day at a specific price. In an audit, the IRS could demand it.

GainsKeeper isn't perfect. Its ways of importing data from spreadsheets or such programs as Microsoft Money may work unevenly. Some of the frustration may diminish as data links to a growing list of partners--now including Datek, E*Trade (ET), National Discount Brokers, and W.R. Hambrecht--become seamless. Investors going to GainsKeeper on their own can get a free, 30-day trial. Annual fees range from $49 to $299, depending on how much you trade.

If you've vowed never, ever to pay for anything on the Web, two other sites offer limited help (table). Smartleaf has a free tool to model the tax effects of selling any given lot of stock. And Quicken.com has stolen a step on such rivals as MSN MoneyCentral by letting users of its "enhanced" portfolio track gains and losses, short- and long-term, by lot. (This works only with Microsoft's Internet Explorer browser.)

As a certified cheapskate, I like freebies more than the next guy. Just the same, if I traded a lot, GainsAdvisor would strike me as a steal.

Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711 By Robert Barker


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