Figure hard before you cash in on asset gains

People who own real-life stocks, mutual funds and other capitalassets have some extra figuring to do right now as they decidewhether to cash in or hang on.

Thanks to rising bond prices and the stock market's climb torecord highs this year, many of them are sitting on some generouspaper profits.

With the shakeout that hit the markets since early November, theurge naturally arises to sell before the gains shrink any further.

But at the same time, the tax consequences of acting beforeyearend may prove costly.

"The sale of investments is one area where you have abundantcontrol over the timing of income," says William Brennan, editor ofthe Ernst & Young Financial Planning Reporter, a bimonthly advisoryletter.

"It is generally not advisable to make investment decisionsbased on tax implications alone. But on the other hand, you cannotignore the effect of taxes on your net investment return."

In most situations, investment advisers recommend that sales ata gain be postponed until January in order to keep this year's taxobligation to a minimum.

They also note that holding on could prove to have a bonusbenefit if the White House and Congress take action in 1992 - anuncertain but not unthinkable prospect - to give capital gains morefavorable tax status.

Long-term gains once enjoyed a preferential treatment that waseliminated by the Tax Reform Act of 1986.

In a change that got less attention, a small amount of thatspecial standing was restored under 1990 legislation that took effectthis year. As a result, long-term capital gains, or profits oninvestments held more than one year, are now taxed at a maximum rateof 28 percent.

One way to reduce the tax burden on capital gains is to takethem in the same year you sell some other investment at a loss.

Losses reduce capital gains dollar for dollar for tax purposes.If a loss exceeds any gains, it can be deducted from ordinary incomeup to a yearly maximum of $3,000, with the balance carried over tofuture years.

Brennan suggests this approach to the problem: "First, determinewhether you have realized a net capital gain or loss on 1991investment transactions to date. Then consider the unrecognized gainor loss on your existing investments.

"If you are about to sell appreciated investments, you mayinstead want to defer recognizing the capital gains until next year.

"Or you may want to accelerate losses into this year to helpoffset net gains."

Merrill Lynch, in a recently published tax planning booklet,adds another thought that can sometimes be overlooked: "Remember, nomatter how heavily it is taxed, a gain is always better than aloss.