Re: stock sale & capital gains tax

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: stock sale & capital gains tax
Date: Wed, 29 Jul 1998 19:53:44 -0400

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>With the changes in the tax law, I have a question about 
>how the new law works.  I believe that you pay a lower 
>tax on your gains if you've held the stock for at least 
>18 months.  So let's say you have the following 

It's changed again.  You now get the lowest rate (10% or 20%,
depending on your overall bracket) after a holding period of only 12
months.

>situation.  Here are the dates and prices for purchase 
>of XYZ stock.
        ^^^^^

>Jan-95  100 shares  $12/sh
>Jan-96  100 shares  $15/sh
>Jan-97  100 shares  $18/sh
>Jan-98  100 shares  $20/sh
>
>Now in July 1998 you sell 200 shares.  In the past I 
>believe that you had several options for determining 
>your per share cost.  These were first-in-first-out, 
>last-in-first-out, and an average.

This is incorrect.  For things other than mutual funds,
you have only two options:
(1) First-in, first-out.  This is the default option.
(2) Specific identification.  You get to pick what shares
    you are selling.  HOWEVER, the choice has to be made
    *at the time of the sale*, not after the fact, and must
    be communicated to the broker.  The broker in turn needs
    to acknowledge your choice on the confirm slip or a
    reasonably cotemporaneous letter.

You can switch between (1) and (2) at will.

For mutual funds you have those two options, and you also have
single-category averaging and double-category averaging.  Like
non-fund securities, you can switch between (1) and (2) at will, but
once you pick an averaging method, you are locked into it until you
finally close out your position in the fund or get approval from the
IRS to change.

Note also that with single-category averaging (overwhelmingly the
most common kind of averaging), you are always deemed to be selling
the oldest shares first, for purposes of determining holding period.

Check out IRS Pub 550 and also www.fairmark.com, which is (IMHO)
an excellent site for plain language explanations of investment
tax issues.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.1



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