For the last month, the media has harped on the declines in Apple Inc. (NASDAQ:AAPL) being due to end of year tax selling. With capital gains and dividend taxes set to rise dramatically next year, investors want to pay the lower tax rate on the gains this year.
Taking profits this year on big gains is definitely the smart thing to do. However, in the midst of selling your stocks that have moved up, do not miss out on easy gains in other trades. This is the less publicized angle but in many cases more profitable as an end of year trade.
Stocks like Intel Corporation (NASDAQ:INTC), Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) have all dropped tremendously in the course of 2012. Based on this, there will be short covering into year end as shorts take their profits to pay the lower tax rate on the gains as well. It does not matter how you got the profits, all investors will have an incentive to take their profits no matter how they got them, short or long. On beaten down plays that are highly shorted, an imminent pop may be under way. Does it not make sense to buy beaten down plays that are highly shorted for the easy end of year pop?
In addition, tax loss selling will be null and void this year. Tax loss selling occurs when investors sell their losers to offset their gains, thus avoiding tax this year. Smart investors should be holding their losers into the new year and then selling them. By doing this, they will have the deduction on gains where the tax rate will be far higher.
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