FIFO and Wash Sale Rules

Financial Planning Tax Strategies
1

I was going to tag onto the previous post, but thought what I needed was a little different. Well, with the stock market in a downward spiral, I have been looking at selling some of my shares before they go negative. So, I am asking about the “First In-First Out” rule. That states that I must absolutely sell my oldest shares first? I thought I saw somewhere that I could “specify” which shares I was selling??

What I intend to do is sell some shares at almost what I bought them for, some might be negative, and some might be positive. Is it possible to specify which shares?

And, if I am able to specify which shares I am selling, does this effect my taxes in some way?

Next question – Then I may be re-purchasing the stock at a later date – Probably way more than 30 days… perhaps 6 months or a year. So, I am not effected by the “Wash Sale Rule?” I was reading the previous post and someone said over 31 days? So, I would definitely wait much longer than 30 days, so that would not pertain to me?

Thanks for your sage advice. I appreciate it.

Footsox

2

Well, with the stock market in a downward spiral, I have been looking at selling some of my shares before they go negative. So, I am asking about the “First In-First Out” rule. That states that I must absolutely sell my oldest shares first? I thought I saw somewhere that I could “specify” which shares I was selling??

It depends on what you’ve set up with your broker. Many brokers default to FIFO on individual stocks but will allow you to specify sale of particular lots if you want to do that. You should be able to find out how to specify the sale of specific lots on your broker’s website, or by calling your brokerage.

And, if I am able to specify which shares I am selling, does this effect my taxes in some way?

The gain/loss will be calculated based on the cost basis of whichever lots end up being sold, whether they are FIFO or specified. Let’s say you have 200 share position in ABCD that you built up with several lots of 10 shares each, ranging from $50 - $200, with an average basis of $75 and you have held all shares for more than 1 year, so all gains/losses would be long-term. If ABCD is currently priced at $100, your overall average gain would be $25/share. If you sell your entire position, you would pay capital gains based on that $25/share, or $5,000. But if you only sell the 10 shares that you have a $200 cost basis, you would be losing $100/share, so you would realize a $1,000 loss, which would be subject to wash sale rules. On the other hand, if you sell the only the 10 shares that you paid $25 each for, you would realize a $750 gain. So by selling specific lots of shares, you can specify the gain/loss you want to realize.

Next question – Then I may be re-purchasing the stock at a later date – Probably way more than 30 days… perhaps 6 months or a year. So, I am not effected by the “Wash Sale Rule?” I was reading the previous post and someone said over 31 days? So, I would definitely wait much longer than 30 days, so that would not pertain to me?

If you are selling at a loss, any shares purchased within 31 days before or after the sale at a loss would invoke the wash sale rules. (Note: This includes shares purchased through dividend reinvestment.) So you need to wait at least 31 days after your last purchase to sell, in addition to waiting 31 days after you sell to re-purchase if you are selling at a loss and want to avoid the wash sale rules.

AJ

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3

I was going to tag onto the previous post, but thought what I needed was a little different. Well, with the stock market in a downward spiral, I have been looking at selling some of my shares before they go negative. So, I am asking about the “First In-First Out” rule. That states that I must absolutely sell my oldest shares first? I thought I saw somewhere that I could “specify” which shares I was selling??

My brokerage allows me to specify the lots that are to be sold or a portion of a lot that is to be sold. FIFO only comes into play if I don’t specify a lot.

The “Wash Sale Rule” requires that there be no purchase of substantially identical shares 31 days before or after the sale that results in a loss.

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I don’t understand the 31 days before. Does this mean if I purchased a brand new stock today and I sell it next week at a loss then I can’t claim a short term loss on it?

5

Ken, That is correct. There is no rule stopping You from making the trade. This is an IRS rule which disallows a tax benefit from doing this.

Mike

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Ken288: “I don’t understand the 31 days before. Does this mean if I purchased a brand new stock today and I sell it next week at a loss then I can’t claim a short term loss on it?”

No. But the key is that you staed “brand new stock”.

The 31 days before is to cut-off people trying to be too cute with the tax code.

For example, say to bought 100 shares of xyz stock 11 months ago, and it is down, but you really want to take the tax loss (even though you want to continue to own the stock). You are aware that if you buy the replacement stock within 31 days that you cannot recognize the loss because of the wash sale rules.

You are a smart fellow, so you decide to buy 100 shares of stock today (May 12) at the lower price; and then next week on Monday (May 16) you decide to sell your original 100 shares of xyz stock in order to recognize the loss. The wash sale rule also prevents this recognition because you simply bought the replacement shares before you sold the original shares.

The realty of the above scenario is that on May 11, you owned 100 shares of xyz stock, and on May 17 you still owned 00 shares of xyz stock, so no real change in position, but absent the wash sale rule you would also be claiming on loss from the sale of the original shares even though there was no real change in your economic position. Form is not allowed to dominate substance, generally speaking.

Regards, JAFO

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JAFO - taking your example, if the fellow sold all 200 shares on May 16, then there is no wash sale and they could take a loss on the 200 shares? This assumed the share price is lower on May 16 than when purchased on May 12.

Thank you, Ken

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Yes, providing that no shares are repurchased for the 30 days following the sale.

Selling all shares and staying out of the investment or substantially equivalent investment means that all losses are realized.

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It doesn’t mean that there won’t be a wash sale show up on your 1099-B but it will net out that all losses are realized.

Even though the sale of the stock occurs during one trading day, it doesn’t mean that all of the stock was sold in one trade.

10

taking your example, if the fellow sold all 200 shares on May 16, then there is no wash sale and they could take a loss on the 200 shares? This assumed the share price is lower on May 16 than when purchased on May 12.

Assuming that he didn’t buy it back again before June 17, yes, he could take the loss. Purchases within 31 days before OR after would trigger the wash sale rules.

AJ

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