1

(The example below is, of course, unrealistically simple, just for the sake of illustration.)


Suppose that I made the following purchases and sales of shares of some stock X:

| 01/15/2021 | bought |  10 shares |  $50/share |    -$500 |
| 02/15/2021 | bought |  10 shares |  $60/share |    -$600 |
| 03/15/2021 | bought |  10 shares |  $70/share |    -$700 |
| 04/15/2021 | bought |  10 shares |  $80/share |    -$800 |
| 05/15/2021 | bought |  10 shares |  $90/share |    -$900 |
| 06/15/2021 | bought |  10 shares | $100/share |  -$1,000 |
| 07/15/2021 | bought |  10 shares | $110/share |  -$1,100 |
| 08/15/2021 | bought |  10 shares | $120/share |  -$1,200 |
| 09/15/2021 | bought |  10 shares | $110/share |  -$1,100 |
| 10/15/2021 | bought |  10 shares | $100/share |  -$1,000 |
| 11/15/2021 | bought |  10 shares |  $90/share |    -$900 |
| 12/15/2021 | bought |  10 shares |  $80/share |    -$800 |
|------------+--------+------------+------------+----------|
| 2021 TOTAL |        | 120 shares |            | -$10,600 |
|------------+--------+------------+------------+----------|
| 03/15/2022 | sold   |  42 shares |  $40/share |   $1,680 |
| 09/15/2022 | sold   |  21 shares |  $30/share |     $630 |
|------------+--------+------------+------------+----------|
| 2022 TOTAL |        |  63 shares |            |   $2,310 |

Clearly, the sales I made in 2022 (63 shares for a total of $2,310) represent a capital loss, since the sale prices were all below the original purchase prices.

I want to claim this capital loss as a deduction when I file my U.S. income taxes for year 20221 to the Internal Revenue Service (IRS).


Q: How I should compute the cost basis for the 63 shares I sold in 2022 so as to maximize the capital loss that I (lawfully!) report to the IRS.


Here are some possibilities that come to mind.

Naively, if I wanted to maximize my capital loss (for the purposes of reporting them to the IRS), I would calculate the cost basis for the sold shares as though they were the ones that I paid the most for in 2021. Here's such calculation:

| 10 shares | $120/share | $1,200 |
| 20 shares | $110/share | $2,200 |
| 20 shares | $100/share | $2,000 |
| 13 shares | $90/share  | $1,170 |
|-----------+------------+--------|
|           |      TOTAL | $6,570 |

With this cost basis, my capital loss would be $6,570 − $2,310 = $4,260.

Another possibility would be that I average out the purchase prices. I bought a total of 120 shares in 2021, and paid $10,600 for them. This corresponds to an average price of ($10600/120) per share. Therefore, the cost basis for the 63 shares that I sold in 2022 would be 63 × ($10600/120) = $5,565. With this cost basis, my capital loss would be $5,565 − $2,310 = $3,255.

Of course, I would prefer the first approach above, but I don't know if it would be acceptable to the IRS. (Actually, I don't know if any of the calculations shown above would be acceptable to the IRS.)


1 And possibly for some subsequent years as well, as carry-over, assuming that the total capital loss exceeds the maximum I can claim as deduction in one year.

4
  • Did you tell your broker what method to use? Did you specify specific shares when you sold the shares? Mar 20, 2023 at 12:25
  • @mhoran_psprep: the answer is "no" to both questions.
    – kjo
    Mar 20, 2023 at 12:26
  • 1
    Then what method does your broker think they were supposed to use? Check your account. Mar 20, 2023 at 12:27
  • You need to specify the lot at the time of sale, not now.
    – littleadv
    Mar 20, 2023 at 16:00

1 Answer 1

4

There are different cost basis methods

  1. First-In, First-Out (FIFO) assumes you're selling your oldest shares first.

  2. Last-In, Last-Out (LIFO) assumes you're selling your oldest shares first.

  3. Specific Identification allows you to select shares with a particular cost basis when you sell.

  4. For mutual funds, you can use Average Cost/Single Category which determines cost basis by taking the average cost of all the shares you own and multiplying it by the number you're selling.

FIFO is the default method for all investments other than mutual funds, unless you provide instructions to the contrary. This must be done at the time of sale (or purchase if short). You can't do it 3 to 9 months or more later, per the data in your chart.

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