What is a tax exchange?

Tax swaps are strategies that include the sale and acquisition of two different but similar securities. Tax swap is usually carried out as a means of using existing tax laws to carry out a loss, which can be used for the total tax liability for a given tax period. Tax swap is therefore a legitimate means of tax management so that an individual or entity creates a smaller tax burden for a given period.

The process of creating a tax swap is relatively simple. First, the investor identifies safety within the current portfolio that was in bankruptcy. This decline rate must take the current market price for safety below the price originally paid investor.

Second, the investor identifies the safety current offered for sale. This new security must be similar to security that will be sold but there cannot be different shares of the same security. The purchase price for new security must be more than the selling price for OLD Security.

by selling decreasesSecurity and obtaining a similar but higher price of security and both transactions in the same tax period, the investor generates the loss that can be used when tax periods come. When implementing current investment laws, this creation of loss for tax purposes is considered to be absolutely legitimate.

While the tax swap process looks attractive on the surface, there is an element for the investor. First, the original security could reverse the current trend and start to rise again, maybe exceed the original purchase price. This would mean that the investor would not receive the advantage of growth because he no longer owns safety.

Secondly, the newly acquired security could experience a descending spiral in short order and create more losses than he had hoped to pull. If the loss is too large, it can mean financial problems for the investor. As a result, the main purpose of the tax swap is porUntil and the investor must be involved in the damage control.