30.2 Earmarking Stock Lots

Keep a record of all your stock transactions, especially when you buy the stock of one company at varying prices. By keeping a record of each stock lot, you may control the amount of gain or loss on a sale of a part of your holdings. If you do not make an adequate identification, the IRS will treat the shares you bought first as the shares being sold under a first-in, first-out (FIFO) rule.

You may not average the cost of stock lots; averaging is generally allowed only for mutual-fund shares (32.10). However, under the new basis reporting rules (5.8) for “covered” securities acquired after 2011, averaging is allowed for most ETFs structured as regulated investment companies, and for shares acquired through a qualifying dividend reinvestment plan (DRIP).

If your stock is held by your broker, the IRS considers that an adequate identification is made if you give instructions to your broker about which particular shares are to be sold, and you receive a written confirmation of your instructions from the broker or transfer agent within a reasonable time.

EXAMPLE
Over a three-year period, you bought the following shares of Acme Steel stock: In 1998, 100 shares at $77 per share; in 1999, 200 shares at $84 per share; and in 2000, 100 shares at $105 per share. When the stock is selling at $90, you plan to sell 100 shares. You may use the cost of your 2000 lot and get a $1,500 loss if, for example, you want to offset some gains or other income you have already earned this year. Or you may get capital gains by selling the 1998 lot or part of the 1999 lot.
You must clearly identify the lot you want to sell. Say you want a loss and sell the 2000 lot. Unless you identify it as the lot sold, the IRS will hold that you sold the 1998 lot under the “first-in, first-out” rule. This rule assumes that, when you have a number of identical items that you bought at different times, your sale of any of them is automatically the sale of the first you bought. So the cost of your first purchase is what you match against your selling price to find your gain or loss. Here is what to do to counteract the first-in, first-out rule: If you have stock certificates registered in your name, show that you delivered the 2000 stock certificates. If the broker is holding the stock, specifically identify the 2000 lot in your selling instructions and get a written confirmation.
On the sale of mutual-fund shares, you have the option of using an average cost basis (32.10).
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.191.178.234