ID stock shares for tax payoff

Due to a recent tax law change, a lot of the guesswork for computing capital gains on sales of securities has been removed from the equation.

Strategy: When it suits your purposes, use the “specific identification” method to identify shares of stock you intend to sell. This may produce a better tax result than the default first-in, first-out (FIFO) method.

Depending on your situation, you might even be able to turn what would otherwise be a taxable gain into a beneficial tax loss.

Here’s the whole story: When you sell securities, you must calculate your taxable gain or loss based on the difference between the sales price and your basis. Your “basis” is usually the acquisition cost plus broker commissions. Also, the basis must be adjusted for events like stock splits and ­mergers.

The resulting capital gain or loss is long term if you’ve held the securities for more than one year. Otherwise, it’s short term. For 2014, net long-term capital gain is taxed at a maximum 15% rate for most taxpayers, increasing to 20% for those in the top regular income tax bracket.

Book of Company Policies D

Previously, brokerage firms re­­ported the amount of proceeds received in a securities sale to the IRS, but not the basis of the shares. How­­ever, a 2008 law changed the rules requiring firms to submit information returns to the IRS indicating the basis of securities sold, the amount of the sales proceeds and whether a gain or loss is long term or short term. Investors now receive the same information on their 1099s. These changes were phased in over three years, but generally apply to sales of stocks and mutual funds acquired after 2010 (see below).

The 2008 law also established the FIFO method as the default method for determining basis when only some of the shares are sold. Barring other circumstances, the IRS will rely on the FIFO method to calculate gain or loss. But you can still ID the shares you want to sell if that works out better.

Example: You acquired 100 shares of Mega Corp. stock in 2011 when the price was $10 a share, 600 shares in 2012 when the price dropped to $5 a share and 300 shares in 2013 when the price rebounded to $20 a share. Currently, you own a total of 1,000 shares with an average cost per share of $9.

Now Mega Corp. stock is selling at $12 a share. If you sell 100 shares of the stock, the IRS will presume that the first shares you bought are the first ones you sold. That gives you a long-term gain of $200. However, if you specifically identify the 100 shares being sold as coming from the block of shares acquired in 2013, you will show a loss of $8 a share. The $800 loss can be used to offset other capital gains realized during the year.

Note that the tax rules provide some leeway. For instance, if your situation dictates it, you can settle for the $200 gain. Alternatively, if you identify the 100 shares being sold as coming from the 600 shares acquired in 2012, the gain would be $700. You might want to opt for a higher taxable gain if you expect 2014 to be a low-income year.

How do you identify the shares that you’re selling? At the time of the sale, you must specify to the broker the specific stock that will be sold. The stock being sold is identified by the purchase date, the purchase price or both.

Tip: Make sure that you receive a written or email confirmation of the transaction.


Target the dates for tax basis

The law changes relating to the basis of securities applies as follows:

  • Stock shares acquired after 2010
  • Mutual fund shares and stock in a dividend reinvestment plan acquired after 2011
  • Other securities, including notes, bonds and commodity contracts and options, acquired after 2013
Tip: You may still need to comb your records for sales of securities acquired before these dates.

Phase-in of reporting rules