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Say I make the following transactions:

  • Jan 5, 2011: I buy 100 shares of Stock X
  • Jan 5, 2012. I buy 100 more shares of Stock X.
  • August 1, 2012: I sell 100 shares of Stock X.

If I have this correct, then any gains I get in selling the shares I bought in 2011 would mean I would be paying a long-term capital gains tax, but selling the shares I purchased in 2012 would mean I'm paying the short-term capital gains tax. Obviously, I would want to pay the long-term rate since it's smaller. Are there steps I need to take with my brokerage firm to ensure that I'm selling the older shares at the time of the sell? Or will my brokerage firm figure that in and I can figure it all out at tax time?

Thanks

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You should tell the brokerage (and do this in writing, not just a verbal instruction over the telephone) which shares you want to sell. You didn't say how much you paid for the 2 lots of 100 shares, but it might be that the short-term gain is enough smaller than the long-term gain that you might prefer to sell the Jan 5, 2012 lot because you will pay less in taxes that way. You may want to mix and match; sell 25 shares bought on Jan 5, 2011 and 75 shares bought on Jan 5, 2012, and so on. You could also use the average cost method for Stock X. –  Dilip Sarwate Apr 1 '12 at 22:23
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1 Answer

up vote 5 down vote accepted

The default is FIFO: first in - first out. Unless you specifically instruct the brokerage otherwise, they'll report that the lot you've sold is of Jan 5, 2011. Note, that before 2011, they didn't have to report the cost basis to the IRS, and it would be up to you to calculate the cost basis at tax time, but that has been changed in 2011 and you need to make sure you've instructed the brokerage which lot exactly you're selling.

I'm assuming you're in the US, in other places laws may be different.

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In Australia it is the same FIFO. Any asset held for 12 months or longer before sold gets a CGT discount of 50%. –  Victor Apr 2 '12 at 0:27
    
@Victor Is FIFO required in Australia or just the default if you don't tell your broker which shares to sell but simply say "Sell 100 shares of Stock X in my portfolio" (same way as in the US)? –  Dilip Sarwate Apr 2 '12 at 3:25
    
@DilipSarwate, in Australia there is no need to make such instructions to your broker, you just give them the instructions to sell, and the tax department treats it as FIFO by default. –  Victor Apr 3 '12 at 4:16
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