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Posted by Barry Margolin on November 15, 2007, 3:01 pm
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kevincostello@cox.net wrote:
> I have bought and sold a number of shares of two particular
> companies over the last two years. When I prepared my taxes
> last year, I calculated the sales as "last-in, first-out",
> maintaining the first shares I had purchased in my account
> in case I ended up holding them more than a year. I have now
> sold all of the shares of these two companies, and by a
> careful tracking of last-in, first-out, I indeed have a
> number of shares that I have held for more than a year, and
> this will save me about $500 on my tax bill.
You can save even more by selling the most expensive shares,
which may not be the last-in. Also, since shares held more
than a year are taxed at a lower rate, you may be able to
save more by selling long-term shares than short-term
shares.
> 1) There is nothing wrong with this method, is there? I have
> been consistent and careful in my accounting for these
> shares over two years, and the numbers work out correctly. I
> have also been consistent in using this method for all
> shares of individual stocks that I own.
The only two options you have for accounting for stock sales
are FIFO or specific shares. LIFO is just a particular case
of specific shares, where you just happen to specify the
youngest shares. In order to use the specific shares method
you have to tell your broker which shares to sell, and get a
written acknowledgement from the broker that they sold the
designated shares. If you don't specify explicitly, you're
assumed to be selling FIFO.
So unless you've been making these explicit designations,
there is definitely something wrong with your method.
In the case of mutual funds you also have the option of
using average cost basis accounting.
> 2) Am I required to use the same holding time accounting
> method for shares of every company I own? Would I be able to
> calculate by "last- in, first-out" for some sets of shares,
> and "first-in, first-out" for others? I would of course be
> consistent for shares in one particular company.
You can use different methods for different companies, and
you can change the method for any particular company at any
time. However, if you sell a mutual fund and use the
average cost basis method you can't go back to specific
shares or FIFO for that fund until you close out your entire
position.
--
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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