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Posted by Barry Margolin on February 11, 2008, 11:20 pm
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curiousgeorge408@hotmail.com wrote:
> On Feb 10, 2:24 pm, se...@panix.com (Seth) wrote:
> > > When I sell some shares in one account, for my convenience,
> > > the broker sends me a statement that shows the basis of the
> > > stock sold, based on FIFO, presumably for me to use on Sched D.
> >
> > > But is that the way the IRS would look at it? Or do I need to
> > > consider FIFO across the multiple accounts?
> >
> > No; Broker 1 can't sell shares held by Broker 2.
>
> Of course not! I never said or implied that Broker 1sold shares
> held by Broker 2. That would be absurd.
>
> Instead, I asked how the IRS would apply the FIFO rule to the
> sale of shares held in multiple accounts.
>
> For example, wash sales rules apply to shares held in multiple
> accounts. That is, a purchase of stock in one account can
> "wash" the loss due to a sale of the same stock held in another
> account.
That's because the wash sale rule is trying to prevent you from turning
paper losses into actual losses with no risk. For this purpose, it
doesn't matter which accounts you use.
>
> That gave rise to my question about FIFO. IR Reg 1.1012-1(c)
> states (emphasis added): "If shares of stock in a corporation
> are sold or transferred __by_a_taxpayer__ who purchased or
> acquired lots of stock on different dates or at different prices,
> and the lot from which the stock was sold or transferred cannot
> be adequately identified, the stock sold or transferred shall be
> charged against the earliest of such lots purchased or acquired
> in order to determine the cost or other basis of such stock".
>
> That is the FIFO rule.
>
> Note that it says "by a taxpayer". It does not say, for example,
> "in an account" -- at least, nowhere that I can find. (Compare
> with the regulation for average basis below.)
But it says "cannot be adequately identified". When you choose which
account to sell from, you're identifying them to be one of the lots in
that account, but no more specific. Then "such lots" in the following
sentence refers to the lots in that account, so you're selling the
earliest of those lots.
>
> I, too, would rationalize that since the purpose of the FIFO rule
> is to provide some degree of identification where "adequate"
> identification cannot be determined to the IRS's satisfaction,
> then it makes sense (to me) that the account itself provides at
> least some degree of identification, which is refined by FIFO.
> Ergo, the application of FIFO should be limited to each account.
>
> That was always my expectation.
>
> But if my rationalizations defined IRS rules, tax law would be
> a lot simpler to apply than it is <wink>. Knowledgable people
> in this forum have repeatedly pointed out that tax law is not
> always "rational" -- at least not in the way that my mind works.
>
> Moveover, I have a vague 30-year-old recollection that the CCH
> tax guide (for tax professionals) suggested that stock records
> be kept based on all holdings of a taxpayer, explicitly not by
> account -- at least for all taxable accounts. I am betting that
> my "recollection" is incorrect -- or no longer applicable. But I
> have a nagging feeling that what I read was a surprise; and
> keeping records per account would not be a surprise to me.
>
> So I still have an open question about FIFO.
>
>
> > > That is, does the MF combine the shares held by the same person
> > > across multiple accounts; or does the MF keep the accounting for
> > > the two accounts separate?
> >
> > That's up to the MF, but my guess is it's a lot easier to keep
> > the two accounts separate.
>
> Mutual funds must do what the IRS (or SEC) requires, whether
> or not it is the easier way to do it.
>
> Having finally located Reg 1.1012-1(e), I see that it answers this
> part of my question dispositively. It states (emphasis added):
>
> "(3) Double-category method--(i) In general. In determining
> average basis using the double category method, all shares in
> _an_account__ at the time of each sale or transfer shall be
> divided into two categories."
>
> "(4) Single-category method--(i) In general. In determining
> average basis using the single-category method, the cost or
> other basis of all shares in __an_account__ at the time of
> each sale or transfer [...] shall be used in making the
> computation."
>
> Note that it clearly states that average basis is computed
> for shares held "in an account", not "by the taxpayer".
How could it possibly be otherwise? The MF doesn't know about other
accounts held by the taxpayer.
--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
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