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  • Halverson & Company

Stock Basis Reporting Options


You are probably aware that brokers must now report your basis in any stocks that you sell during the year to the IRS. (See blog post, “The Corrected 1099-B”, for additional information on this topic.) Your basis is usually what you paid for the stock. By comparing your basis in the stock to what you sold it for, you can determine your capital gains or losses.

When you sell all the shares of stock that you hold in one company, your broker simply adds up everything you paid for the shares and reports all of it. However, if you only sell a portion of your shares, your broker has to pick which shares you sell. How does this impact you? If you purchased your shares over a period of time, you likely paid different amounts per share each time you bought them. Generally speaking, you would prefer to sell the shares that you paid the most for since that would result in the lowest gains or largest losses. Your broker’s choice can also determine whether your sale results in short-term or long-term capital gains or losses. Long term capital gains are subject to a lower tax rate than short-term capital gains so you generally prefer long-term capital gains.

You might hope that your broker could always make the best choice for your situation. Unfortunately, the IRS has mandated that brokers generally must sell your shares in the following order:

First: sell any shares for which your broker does not have your purchase information

Second: sell all other shares in the order that you purchased them (first in first out method)

Although this default method will often be the most likely way to generate long-term capital gains, it can result in you paying more taxes than you otherwise could because your broker can’t choose the highest basis possible for each sale. The only way for your broker to use a different method of choosing which stocks to sell, such as highest cost, is for you to contact them and tell them your preference.

Although the “highest cost” method would generally be advantageous for most taxpayers, it does not fit every situation. In particular, 2012 might not be the best year for this method. In 2013, new taxes on investment income and the potential for increases in capital gains tax rates may mean that 2012 is a better year to recognize capital gains and pay the taxes on them.

If you have not already determined which method is the best for you, we would invite you to contact us so that we can discuss this area with you and your broker and/or financial advisor. As you can see, your answer may change each year depending on what other investments and transactions you are involved with. Making the right choice in this area is a way for you to control at least some of the tax uncertainty and can result in significant tax savings for you.


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