Saturday, February 26, 2011

Getting a Tax Break

A large number of online brokers still don’t give investors much choice on the accounting treatment of their stock sales.

When we recently surveyed our readers about what they most wanted from their online brokers, a majority said they were concerned about the new Internal Revenue Service cost-basis regulations that go into effect this year.

Brokers are now required to report the cost basis of any of your stock holdings to the IRS when you sell them. Those cost-basis reporting requirements will be extended to mutual funds in 2012 and to options in 2013.

On the face of it, having your broker report your cost basis should help at tax time. You won’t have to dig around and figure out how much you paid for a certain stock because it will be right there on your 1099. In theory, at least, the new requirement is straightforward. But it opens up quite a few cans of worms.

One feature we look for when we review online brokers–either individually or as part of our annual rankings (the next one is due out March 14)–is the ability to choose which lot of stock you’re selling at the time you place your closing order. For instance, if you’ve been piling up shares of General Electric (ticker: GE) over time, purchasing several hundred a year for the past 10 years, you will want to specify exactly which batches of those shares you’re selling.

THIS IS AN IMPORTANT ISSUE. You may want to choose the highest-cost lots of stock that you’ve held for more than a year to minimize your capital-gains tax. Or you may want to sell your cheapest lots and just take the tax hit now. If you’re the sort of investor who buys the same stock, especially if you plan to hold it for the long term, being able to choose which shares you’re selling will help you control your taxable income each year.

Most brokers have you set up your cost-basis system when you open an account, selecting LIFO (last in, first out), FIFO (first in, first out) or average cost as their system of tax reporting. But few brokers let you choose which shares you are actually selling when you close a position.

Among those that have built the capability into their platforms: E*Trade (, Fidelity (, MB Trading (, optionsXpress (, Muriel Siebert (, Charles Schwab ( and TD Ameritrade (

OptionsHouse ( is rolling out a new platform this month that lets a customer pick a tax lot.

Brokers that focus on active traders, such as Interactive Brokers ( and Lightspeed Trading ( don’t let you choose a tax lot, but they also don’t expect their customers to hold onto their positions for very long.

AS STEVE SANDERS, vice president at Interactive Brokers, explains, choosing a tax lot before a trade just isn’t very important to his customers, though it may be to other sorts of traders. Because IB clients typically buy and sell very quickly, “our customers wouldn’t have time to choose lots before a trade,” Sanders notes. Instead, the customers can let IB’s computer decide how to match a particular trade to specific tax lots.

In fact, few brokers who focus on buy-and-hold investors make it easy to link trades and tax lots.

For example, to assign a tax lot, a Scottrade ( customer must call the firm the day after a trade. And quite a few, including Firstrade, eOption, Cobra Trading and TradingBlock, either don’t allow you to choose or ask you to call a broker.

The bottom line: Make sure that your online broker offers you the tools you need.

Published in Barron’s, February 21, 2011. 

Posted by twcarey on 02/26 at 10:03 AM
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Saturday, February 12, 2011

Fidelity Floats on a Cloud

The huge asset manager introduces a new Web-based app for its active trader customers.

Active traders can now access Fidelity Investments via the cloud.

For several years the fund giant has provided a software application that active traders can download onto their own computer systems. Now the firm is offering a Web-based application via its site or through its site. It includes a variety of streaming tools, such as quotes and charts, and links to research available on the regular Fidelity site.

"The new platform fills a key gap in terms of what our active-trading clients are asking for. Mac users wanted active-trading tools without having to use Windows emulation software, and people who trade from multiple computers also wanted these streaming tools,” explains James Burton, president of Fidelity Brokerage Services.

Having what some refer to as a “bridge” application that provides the functions of downloadable software available on the Web is a relatively new development for online brokers. TradeMonster and optionsXpress already offer similar applications and more are on the way. These additions will bring more customization and streaming data to more customers.

The Web application, written in-house in Microsoft Silverlight, will eventually be nearly identical to the downloadable platform. Burton says some features are only available on the desktop version simply because it has more processing power, but that the Web release will have some items for traders that the downloaded version does not.

We took a look at the features available by clicking on a link in the Portfolio page, which opens a window on your desktop. Like the downloadable version, you are presented with a default desktop view that you can customize so the tools you want are where you want them.

The streaming news feature is well designed, showing headlines for symbols in your portfolio, or watch list, or for particular sectors you want to track. You can rearrange the blocks of headlines so that the items on subjects or companies that interest you most are on top. There are more than 20 news providers, including Reuters as well as Barron’s affiliates Dow Jones and MarketWatch; you can filter the feeds to show particular providers if there are some you prefer.

Of utmost importance to frequent traders is real-time data, including how much money you have available to trade and a current price. Your onscreen trade ticket displays this data; you can place the ticket wherever you’d like it to appear. The order-status screen displays working orders placed using any Fidelity application, whether via the Website, your smartphone, or on the phone with a representative. Modifying or canceling an order is easy with the order-status tool. You can trade options.

The streaming chart package includes drawing tools such as trend lines, over 40 technical indicators like moving stock-price averages and a slider bar that lets you define the date range for your study. You can search the indicator list for a specific item, and preview your selected indicator before adding it to the chart. Click on it to add it to the chart, or hit the X in the top right corner of each box to remove it. Once a chart has been customized, you can save the view for future use, no matter where you log in from. The time slider at the bottom gives a visual historical perspective, allowing you to shorten the view or stretch it. As much as 15 years of price history is available. doesn’t yet offer streaming options chains, which display current quotes for strike prices and expiration dates. However, Jennifer Samalis, vice president of active-trader product development, says Fidelity plans to add those later this year. Most research, and trading for anything besides stocks and options takes you back to the Fidelity Website. The tool is free to qualified Fidelity customers who traded at least 120 times over the previous 12 months and maintain $25,000 in their account. Stock trades are $7.95 per transaction, while options are $7.95 plus 75 cents per contract.

GOING FOR THE GOLD: Interactive Brokers ( makes it possible to trade two new products through its United Kingdom affiliate. IB Spot Gold gives you access to the London bullion market and IB UK CFDs (Contracts for Difference) let you trade the difference between the current and future price of a share. The latter product attempts to mirror a stock, including its price movements, dividend income, any tax benefits and allows a trader to use additional margin. You can bet for or against the shares.

In order to take advantage of these offerings, you must find out if you are eligible to trade them. U.S. and Canadian residents must complete a questionnaire in the account management screen to see if they qualify.

TAX TIME:I lamented (some would say ranted) last winter about the way publishers of tax-software packages treat options traders—by mostly ignoring them ("Lack of Options in Tax Software,” Electronic Investor, March 1, 2010). Unfortunately, not much has changed this year. TurboTax still doesn’t have a special slot for options, making options traders click all the way through to “Other Investments” if they’re doing manual entry. The omnibus category (stocks and bond merit their own sections) means a lot more key clicks are needed to get the information entered.

While talking with executives from both Intuit’s Turbo Tax ( and H&R Block (, I was surprised to learn that there aren’t any options traders advising on product development. Turbo Tax did a good job of automatically importing options transactions from three different online brokers into our test return. But if your financial institution isn’t on their list of providers, you’re stuck in the “Other Investment” category.

If you’re going to do your taxes yourself, TurboTax will make data entry easier due to its extensive links to financial institutions, aided by its acquisition of Still, it’s much more expensive than other personal tax packages, because investors have to buy either the Premium ($49.95 federal) or Home and Business ($74.95 federal) versions. State programs are an additional $36.95.

H&R Block will work well, and at a much lower price, for those of you who primarily trade stocks and mutual funds. You’ll have to buy either the Deluxe version ($29.95 federal) or Premium ($49.95 federal), and lay out an additional $34.95 per state. Both firms allow you one federal e-file per program; if you file multiple returns from the same program, you’ll have to pay extra.

Some day tax software publishers will discover options trading. I’m not holding my breath, though. 

Published in Barron’s, February 7, 2011. 

Posted by twcarey on 02/12 at 02:05 AM
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