Understanding Financial Problems

Minimizing Income Tax By Selling Specific Shares Of Stock

Some investors own identical shares of corporate stock that were purchased at different times and at different prices. If any of the identical shares are sold, the cost basis of the shares sold must be determined in order to calculate gain or loss. Individuals who sell stocks can minimize their taxable gains by taking steps to specifically select which shares of stock are sold.

The default method that brokers use in determining which stock shares are sold is to consider the shares sold to be shares that were bought earliest. The first-in, first-out method is also referred to as FIFO. An alternative method is available, allowing you to select which of the identical shares are sold. Selecting specific shares to sell provides you greater control over the various tax consequences of selling stock.

Gain or loss on sale

If you have purchased multiple lots of stock in a particular company, it is generally to your advantage to sell stock with the highest cost basis first. By minimizing the gain on the sale, your current taxable income is minimized. However, the gain or loss on the sale of stock is not the only factor to consider when deciding when to sell.

Short-term or long-term holding period

Corporate stock owned by an individual as an investment is a capital asset. If the stock is held for more than one year before being sold, the gain is taxed at a lower long-term capital gain rate. In contrast, a gain on the sale of stock held for one year or less is a short-term capital gain and is taxed as ordinary income.

Broker communications

In order to avoid the default FIFO treatment of stock sales, you must notify your broker of your intentions before the sale transpires. In fact, you must also receive written confirmation from your broker to acknowledge your directive. Hopefully, your broker has a system in place that can conveniently provide you with written acknowledgment as needed.

Additional record keeping

Selling specific shares requires you to keep track of each lot of stock that you have purchased over the years. After each stock sale, your records will need to be updated to reflect the removal of specific shares from your retirement portfolio.

If a loss on the sale of a particular stock seems inevitable, you might prefer to sell specific shares and allow the loss to offset taxable gains on other sales. Contact a financial planner for more information on the strategic selling of stock.