Selling stocks in specified lots can mean capital loss, tax savings


June 19, 1994|By SUSAN BONDY

Sometimes, you can save money just by saying the right words at the right time. Designating lots is one of those times.

If you buy 100 shares of XYZ Co. and a few months later buy another 100 shares, you own two different "lots" of XYZ stock. You may be able to save "lots" of tax money by designating the lot you are selling before you sell it or as you are giving your sell order.

When you sell a stock, if you cannot (or do not) identify the specific lot you are selling, the Internal Revenue Service assumes that you sold the first lot you bought (following FIFO -- first in, first out). But if you designate the lot, you may be able to turn a loss into a gain or a gain into a loss for tax purposes.

Keeping track of different lots is particularly important for strategies that involve buying several lots of the same stock -- for example, dollar-cost averaging, dividend reinvestment or monthly purchase plans.

The savings from declaring the lot of your choice is illustrated in this example:

You own 300 shares of XYZ Co. One hundred shares were purchased at $10 a share three years ago, the next 100 shares at $20 two years ago, the last 100 shares at $30 a share seven months ago. The price of the stock is currently $20 a share.

Now, you have some misgivings about the company and decide to lighten up by selling 100 shares at the $20 price. If you do not designate the lot, the IRS assumes you sold the $10 stock (the first lot), and you will have a taxable gain of $1,000 ($2,000 proceeds from sale minus $1,000 purchase price). If you designate the second lot as the lot you are selling, you will be even, with no gains or losses. If you designate the most recent lot you bought at $30 a share, you will show a $1,000 loss.

Depending on your overall investment results and your tax bracket, the disparity between a $1,000 gain and a $1,000 loss can make a big difference in the size of your tax bite. Since for 1994, the federal capital gains tax is still capped at 28 percent, you will either pay $280 ($1,000 at 28 percent) on the gain or get a $280 ($1,000 at 28 percent) tax savings for the loss. Of course, these amounts are higher when state and local taxes are included.

The decision whether to take the gain or loss depends on your tax picture for the year. If you think you'll have taxable gains, take the loss. If you anticipate more losses than gains, take the gain.

If the picture is fuzzy, take the loss.

Tax losses are used to offset capital gains tax, but if you run out of gains, you can also offset up to $3,000 of income per year and save up to $395 in federal taxes alone, at the top income bracket. Any unused losses can be carried forward until they are used up.

Note: In case of an audit, you must substantiate the instructions you gave to your broker at the time of the sale. Therefore, you should designate the lot when you put in your sell order. The confirmation of the sale will then read, "Sold 100 XYZ shares against purchase of (month/day/year)." "Month/day/year" is the purchase date of the designated lot. This will provide acceptable proof of your intentions to the IRS.

Susan Bondy founded her namesake financial services company in 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How To Make Money Using Other People's Money." Write to Susan in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.

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