Understanding the Big Difference in Tax Lots when Selling of Stock

Let’s say that you are adjusting your portfolio allocations or trimming a position in a stock or fund you’ve been accumulating. If I want to sell, say 100 shares of my holdings in DIA, an ETF that tracks the Dow Jones Index. I can just enter the number of shares to sell, click the sell button and your sale goes through. Behind the scenes your broker might use the first in, first out method (FIFO). This simply means that the first shares purchased are also the first ones to be sold. Since each purchase you made has a cost per share at the time, your gain or loss is calculated for tax purposes.

 Now let’s say that you are looking for a special tax treatment on your sale, for example you’d like to choose between a short-term loss vs. a long term gain (let’s just assume you would never have any “Long Term Losses”. If this is the case you’ll want to make sure your broker will allow you to specify the specific tax lots that you’d like to sell. There are some years when, at year end, I’m looking to take “advantage” of some losses and dump some stocks that are no longer performing. I’ll pair these losses with selling some gains in stocks that have appreciated. I’ll buy back the stocks that had gains, but I want to take advantage of the losses. Don’t worry; this is not a “Wash Sale” since it was a gain.

 Here is an example showing various tax lots that make up a single position in an account. Notice how you can specify the exact number of shares to sell from each tax lot to control the tax consequences.

Tax Lots

 

 

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