During the month of December (and often, towards the very end of the month) transactions are being finalized for the purpose of fixing tax consequences for the year. However, if you act too hastily when selling stock, you may not be maximizing your tax planning opportunities.
“Tax lots” play a big planning role in determining when you will have to recognize income or when you can use losses. If you have acquired stock in a company at different times and different prices, you have different “tax lots” of that stock, notwithstanding that all the stock you own is often aggregated into a single “lot” for ownership purposes.
For example, if you bought 500 shares of ABC stock in 2010 at $80 per share, and another 500 shares in 2016 at $200 per share, you have two “tax lots” of ABC Stock. If you order your broker to sell 200 shares of ABC today at a value of $150, without providing any further direction, the default rule for tax purposes is that your oldest stock is deemed to be sold first. Therefore, the sale would be treated as if 200 shares from the 2010 tax lot were sold. This would result in approximately $14,000 in long-term capital gain income. If a different result is intended (such as selling some of the more recently purchased stock to generate losses to be used currently), you must take additional action to properly identify the securities which are to be sold.
There are numerous facts (such as whether stock was left in the custody of a broker or if you have the physical certificates in your possession) that can influence how proper identification is made, so care should be given to ensure that the manner of completing the transaction accomplishes your tax planning purposes.
For more details, please contact W. Scott Johns V or give him a call at 561.686.3307.