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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Different ways to calculate stock's cost basis
Tax Talk

Tax on a stock gain or loss
 

Dear Tax Talk:
Can I use last in first out, or LIFO, in calculating the cost basis for stock? For example: I would like to keep few core holdings of a stock and continue buying and selling the same stock for short-term gains so can I use the LIFO method for cost basis for taxes.
-- Suresh

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Dear Suresh,
When an investor sells stock, there will be a reportable gain or loss on the sale. Gain or loss is measured as the difference between the selling price of the stock and its adjusted basis.

The adjusted basis of stock acquired by purchase is usually its cost plus commissions, which sounds simple enough. However, nothing in tax is that simple, and as you point out, there are different ways to calculate cost.

An investor in stocks has two permissible methods for identifying cost of stock sold. An investor can use specific identification as one method. If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. You will make adequate identification if you show that certificates representing shares of stock from the lot you bought on a certain date or for a certain price were delivered to your broker or other agent.

If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. This is known as FIFO, or first in first out. Except in the case of certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of the shares.

Hence, the only way to use the last cost is to specifically identify the shares to be sold. Because most investors leave their holdings in street name with their broker, there would be no delivery of shares for identification. If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you:

  • Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer.
  • Receive a written confirmation of this from your broker or other agent within a reasonable time.

Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent.

Bankrate.com's corrections policy -- Posted: Jan. 8, 2008
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