The ownership feature of HOLDRS creates powerful tax advantages:
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Avoid embedded capital gains. A
recent Morningstar study showed that embedded capital gains represent
34% of net asset value for large index funds with below-average turnover.
That means if you purchase one of these index funds, you might eventually
have to pay taxes on more than a third of your initial purchase, even
though you may have purchased the index fund too late to benefit from the rise in stocks
that triggered the tax liability. You can eliminate your exposure
to embedded capital gains through the ownership structure of HOLDRS.
With HOLDRS, you owe taxes only on gains that occur after you buy
your shares. Your capital gain or loss is simply the price at which
you sell minus your total investment.
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Limit taxes resulting from turnover.
The composition of your HOLDRS doesn't change, except in special cases like corporate
mergers, acquisitions and other specified "Reconstitution Events". As a result, the buy-and-hold
feature of HOLDRS limits taxes resulting from portfolio turnover.
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Control realization of gains and losses.
Some investments create tax liabilities that the investor cannot predict or control.
With HOLDRS, you control when and how you realize capital gains and losses.
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Personalize tax strategies.
With HOLDRS, you can fine-tune your tax exposure easily. You can buy or sell your entire
HOLDRS to realize overall gains or losses. Or you can exchange your HOLDRS for the underlying
stocks and realize gains and losses in the individual stocks you select. For example, you can
take tax losses in any stocks that have declined. HOLDRS are unique in that they allow you to defer
taxes on your best-performing stocks indefinitely. And HOLDRS do not cap any big winners.
You should consult your own tax advisor.
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