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Be a tax detective: ID your stock shares

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in Small Business Tax

The stock market has been unusually volatile this year. Thus, you could own shares of the same stock purchased at varying times and prices. How do you figure your tax gain or loss on sales of the shares?

The IRS assumes that the first shares you bought are the first you sell. It uses a “first-in, first-out” (FIFO) method.

Strategy: Don’t automatically go along with that assumption. Instead of using the FIFO method, you can specifically identify securities you intend to sell. Figure out if an ID will save tax dollars.

Example: Say you bought 100 shares of Widget Company stock on Jan. 1 at $10 a share. Then you acquired 600 shares on May 1 when the price dropped to $5 a share. Finally, you bought 300 shares on July 1 when the price rebounded to $20 a share. Currently, you own 1,000 shares of Widget Company stock with a $10 average cost per share.

Now you see the stock price is up to $12 a share. If you sell 100 shares, the IRS will presume that the first shares you bought on Jan. 1 are the first ones you’ll sell. That will result in a shortterm gain of $200 (100 shares ´ $2 per share). However, if you specifically identify the 100 shares you are selling as coming from the shares acquired on July 1, you will show a loss of $8 a share (see chart). The $800 loss (100 shares ´ $8 per share) can be used to offset other capital gains realized during the year.

Note: The IRS gives you some leeway in this area. For instance, if it suits your needs, you can settle for the $200 gain. Alternatively, if you identify the 100 shares being sold as coming from the 600 shares acquired on May 1, your gain would be $700.

To ID the shares you’re selling, stipulate to the broker or agent the specific stock to be sold. Identify shares by the purchase date, the purchase price or both. Make sure you receive a written confirmation.

  Date stock acquired Price per share when acquired Price per share when sold Gain (or loss) per share
FIFO method Jan. 1   $10 $12 $2
Specific ID method July 1   $20 $12 ($8)

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