ABC Taxes, Tips & Tools

When some­one sells stock the IRS auto­mat­i­cally assumes the first shares bought are the first shares sold, First In First Out (FIFO). How­ever if the tax­payer can specif­i­cally iden­tify shares pur­chased at dif­fer­ent dates for dif­fer­ent amounts they do not nec­es­sar­ily have to blindly fol­low FIFO.

e.g.  Stan Stock­holder buys share in Volatile Cor­po­ra­tion at var­i­ous times of the year.  Stan keeps detail records of his trans­ac­tions.  Stan purchased

• 100 shares on Jan­u­ary 15 when the price was $10 per share. ($1000)
• 500 shares on July 7 when the price dropped to $5 per share ($2500)
• 100 shares on Nov 18 when the price rebounded to $20 per share ($2000)

Then Stan decides to sell 100 shares of stock while Volatile Corporation’s price is $12/share on Jan­u­ary 8 of the fol­low­ing year. In this case the sale of any shares sold would on Jan­u­ary 8th would result in either short-term gain or short-term loss.

With­out any other infor­ma­tion the IRS will assume the 100 shares sold are the first one’s he pur­chased for a net short-term gain of $200 under FIFO.

How­ever if Stan kept detailed records (in the event he trades stock him­self) or tells his bro­ker which shares to sell, Stan need not sell the first 100 shares of Volatile Cor­po­ra­tion he pur­chased.  If he sells the ones pur­chased on Novem­ber $18 he will have an $80 short-term loss; he might want sell these shares to off­set other gains he expects to have in the year.  If he sells the some of the shares pur­chased in July he will have a $700 short-term gain; he might want to do this if he expects the cur­rent year to be a low-income year.  Stan can also just use FIFO if he desires, requir­ing no effort on his part.

How does Stan pick the shares he sells? If Stan decides to use the shares pur­chased in July or Novem­ber instead of the ones pur­chased in Jan­u­ary, he must spec­ify those shares at the time of sale to his bro­ker or agent by pur­chase price or date or both.  Stan must receive a writ­ten com­mu­ni­ca­tion of the trans­ac­tion in as proof of this alter­nate sale trans­ac­tion.  If Stan is a trader who does not use a bro­ker, he must keep detail records of his own transactions.

As always, small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in. The con­tent of this blog gen­er­ally applies to busi­ness and indi­vid­ual tax­a­tion in the United States of Amer­ica.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant, human resource spe­cial­ist, or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.

Tags: alternate shares, FIFO, gain, individual, loss, specific identification, stock sale

This entry was posted on Wednesday, April 7th, 2010 at 1:20 pm and is filed under Business Taxes, Individual Taxes. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.