Many factors can affect the tax consequences and your net investment return on the sale of a security. You’re probably focused on factors such as how much you paid for the investment vs. how much you’re selling it for, whether you held the investment long-term (more than one year) and the tax rate that will apply.
There are additional details you should pay attention to that may impact the amount, timing, and tax costs of the gain or loss. If you don’t, the tax consequences of a sale may be different from what you expect.
Here are a few details to consider when selling a security:
Identify Which Shares You’re Selling
In general, when you sell a security purchased in tax lots at different times and at different prices, unless you adequately identify which tax lot you are selling, the IRS requires you to assume a first-in-first-out rule to determine the basis and the holding period of the security. Therefore, if you want to ensure that the sale will qualify for long term capital gain treatment, you can adequately identify shares that were purchased more than a year prior to the sale. Similarly, if you want to minimize the gain or maximize the loss, you can adequately identify shares with the highest cost basis.
Trade Date vs. Settlement Date
When it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss. Also, the trade of the purchase and the sale will be used to determine your holding period.
While transaction costs, such as broker fees, aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.
If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us. If you have questions, I can be reached at meagan@BerdonLLP.com or contact to your Berdon advisor.