Recently, we discussed how to specify which shares of a stock or fund you’re selling — if you’re not selling your full position — so you sell the shares with the smallest taxable gain. (Each separately-purchased set of shares is called a “tax lot.”)
Unless you are willing to accept the IRS presumption that you are using the “first in, first out” method . . . which often means selling the shares you bought cheapest . . . you have to let the broker or fund company know which shares you want to sell by specifying a “versus purchase” (VSP) date. As in: “Sell the 50 shares I bought on April 3, 1986.” And you have to get and keep written confirmation from your broker or fund company.
Mike Watts, Associate Professor of Accounting at the University of Arkansas, has pulled up the actual regulations . . .
Treasury Reg. Sec. 1.1012(c)(3):
(i) Where the stock is left in the custody of a broker or other agent, an
adequate identification is made if —
(a) At the time of the sale or transfer, the taxpayer specifies to such
broker or other agent having custody of the stock the particular stock to be
sold or transferred, and
(b) Within a reasonable time thereafter, confirmation of such specification
is set forth in a written document from such broker or other agent.
As a practical matter, some brokers aren’t set up to do this very well. Mike recounts his own experience . . .
“I’ve had problems, both myself and with clients, where the broker or mutual fund management company did not provide any type of confirmation. The issue has never come up in an audit, but it seems to me that the brokerage houses and the mutual fund companies should be doing all that they could to ease any potential problems for their customers.”
Realistically, as I suggested last time, if you make a good faith effort to specify the shares, by faxing in a note and keeping a copy of that with your records, you should be able to sleep well. There’s only a remote chance you will be audited and that, if audited, this will be an issue, and that, if you are and it is, your auditor will decide to be a complete [expletive deleted].
Tomorrow: Something — anything! — less boring