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.

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