The new tax law makes the short term buying and selling happening under the system, the same tax-wise as long term trading. No longer is there a tax break on long term capital gains. You will be making profits from this system and will pay taxes on them. Merrill Lynch reports all your transactions to the Feds on 1099 forms. But it's not all bad. Tax rates are lower and you get to deduct your expenses - commissions, phone calls, research material.
The spreadsheets that you are keeping on all your stocks will help you to figure your basis (cost of the stock) that you will need to figure out the amount of profit. There are several ways to figure basis, all high falooting accounting terms like LIFO and FIFO. LIFO stands for Last In First Out. FIFO stands for First In First Out. I recommend FIFO. It will work out to be simpler. In the system you're going to be buying $ 5 shares of stock that will be sold as $10 shares of stock to greatly simplify the system.
I'll give a simple example of how this works:
| YOU BUY | 100 SHARES AT $10 A SHARE | JAN 1 |
| YOU BUY | 100 SHARES AT $5 A SHARE | FEB 1 |
| YOU BUY | 100 SHARES AT $4 A SHARE | MAR 1 |
| YOU SELL | 125 SHARES AT $15 A SHARE | APR 1 |
| YOU SELL | 100 SHARES AT $20 A SHARE | MAY 1 |
This is hypothetical but greatly hoped for.
How would you figure your taxes? I'll include commissions,
phone calls, and other deductible costs. Under FIFO, you use
the cost of the stock you first bought (the oldest shares of
the same stock you're selling). So the cost (basis) of the
first 125 shares in the example above would be:
100 shares X $10 = $1,000 (acquired Jan. 1)
25 shares X $ 5 = $ 125 (acquired Feb. 1)
125 shares $1,125 (your basis for the 125 shares)
The $1,125 is only part of your cost. Let's say you paid $100 in commissions to get the stock, had $ 20 in phone calls, and bought $30 in research reports. Here's your total basis:
Stock - + $ 1,125
Commissions - $ 100
Phone Calls + $ 20
Research Reports -+ $ 30
TOTAL COST $ 1,275
Now how much profit did you get? You sold your 125 shares at $15 each for a total of $1,875. But did you get $1,875? Let's say you paid $100 in commissions to sell the stock, hada $10 phone call, a bought one research report for $10. Here's your total profit:
Stock - $1,875
Commissions - - $ 100
Phone Call - - $ 10
Research Report - $ 10
ACTUAL PROCEEDS $1,755
Thus actual profit was $1,755 - $1,275 = $480.
Next month you sell 100 shares. Your cost of this 100 shares
would be:
75 shares X $ 5 = $375 (remaining 75 shares bought
Feb. 1)
25 shares X $ 4 = $100 (25 of the shares bought
Mar. 1)
Thus basis is $475 plus any commissions, phone calls, research reports directly related to this stock. Your actual proceeds are 100 shares X $ 20 = $2,000 minus commissions, phone call, and any directly related costs. The government subsidizes some of your costs.
This is one reason you need to save all the statements that Blueprint or your broker sends you every time you buy or sell. Also, save your phone bills and receipts for the stock reports.
On your Schedule D Capital Gains and Losses Form (see at end of chapter), all you have to put on the form are the dates you bought and sold and the actual proceeds from the sale and the total cost. Then subtract the cost from the proceeds and the difference in the proper place. Basis goes in column E and sales proceeds go in column D. Then add all profits and subtract any losses (if you lost money from another investment). You can take up to $3,000 in losses in one year. If you had more than $3,000 you have to carry it forward and use it the following year. All your short term capital gains are taxed at your rate for adjusted gross income. Long term capital rates change so often consult the current year's form. In realty for small investors any differences between short and long term would be so slight it isn't worth worrying about. After you summarize your profits, the total amount goes on your 1040 on line 14 of the 1987 return - Summary of Schedule D.
I don't claim to be a tax expert so if you have any questions in your own mind see an expert. This will be your year-end look at how you did with the system. The bottom line is profits and you will see them and they will grow year to year. Good luck and may you be free from the chains of having to work at something you don't want as soon as possible.
I've enclosed a copy of my 1987 Schedule D that shows how I figured my taxes on my stocks. My basis was my cost per share from my original purchase on 7/25/86. It's easy to figure: check out Chapter 6 for a sample of 1099 from Blueprint. Alaska Airlines = $550 divided by 32.8437 shares = $16.75 (notice how this allows for the commission).
Check Schedule D and then check the 1099 from Blueprint and you'll see that to figure sale price, all I did was subtract the commissions' Blueprint charged. The forms Blueprint sends you shows the gross (before charges) and net sales price (money you get). You report the net sales price. You only pay taxes on your actual profits.