As I write this, the full Senate is considering the Tax Cuts and Jobs Act (TCJA). One provision in the Senate’s version of the TCJA impacts the treatment of capital gains. Specifically, the provision would eliminate your ability to specify which lot you sold if you purchased shares of the same security on more than one date. Here is the specific text from the legislation:
“Unless the Secretary permits the use of an average basis method for determining cost, in the case of the sale, exchange, or other disposition of a specified security [within the meaning of section 6045(g)(3)(B)], the basis (and holding period) of such security shall be determined on a first-in first-out basis.”
Things could change in the Senate or during the reconciliation process, if the bill gets Senate approval. (The House version of the TCJA does not contain this provision.) Still, since some AAII members have contacted me about the potential change, I thought it might be helpful to discuss the rules under current law and how the provision would alter them.
Under current law, you are required to specify which shares of a security you sold when calculating your capital gains and losses. An advantage of the specific-share identification method is the ability to manage your tax liabilities by picking shares with the most advantageous basis. (The basis is the value of the item at the time of acquisition or purchase.) Say you bought 100 shares of XYZ in January at $25 per share and 100 more shares after the stock jumped to $40 in April. The stock has since pulled back to $35, which is below your April purchase price but above what you paid in January. If you provide instructions to your broker BEFORE you place the trade, you can sell the lot of 100 shares purchased in April—instead of the lower-priced January lot—to realize a loss for tax purposes. Continue Reading »
More on AAII.com
- Capital Pains: Rules for Capital Losses – If you have losses, you can use them to offset gains and can carry any excess losses over into future years.
- The Tax Consequences of Investing – For those seeking an overview of the tax rules as they apply to investing, this article gives a helpful primer.
Highlights from this month’s AAII Journal
- The Impact of Out-of-Pocket Medical Spending on Retiree’s Income – Expenditures, not surprisingly, varied widely, ranging from about $2,000 (or less) to nearly $10,000 (or more) in 2014.
- Fund Manager Experience Does Not Predict Outperformance – Just 60% of fund managers who have solely managed their respective funds for at least 10 years beat their benchmarks.
AAII Sentiment Survey
- Bullish: 35.9%, up 0.5 points
- Neutral: 32.4%, down 3.1 points
- Bearish: 31.6%, up 2.6 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
What’s Trending on AAII
- Strategies for Managing Required Minimum Distributions
- The Level3 Withdrawal Strategy to Maximize Your Long-Term Wealth
- Discontinuing the Model Fund Portfolio, but Keeping the Level3 Passive Portfolio
The Week Ahead
My colleague Wayne Thorp will participate in the Alliance for Investor Education’s Funding Your Future investor boot camp. The free event will be held on Tuesday in Washington, D.C. More information and registration is available on this website. AAII is a member of the Alliance for Investor Education.
The earnings calendar only lists six S&P 500 companies: AutoZone Inc. (AZO) on Tuesday; Brown-Forman Corp. (BF.B), Broadcom Ltd. (AVGO) and H&R Block Inc. (HRB) on Wednesday; and Dollar General Corp. (DG) and Cooper Companies Inc. (COO) on Thursday.
The week’s first economic report will be October factory orders, released on Monday. Tuesday will feature October international trade and the Institute for Supply Management’s (ISM) November non-manufacturing index. The November ADP Employment Report and revised third-quarter productivity will be released on Wednesday. On Friday, November jobs data—including the change in nonfarm payrolls and the unemployment rate—as well as the University of Michigan’s preliminary December consumer sentiment survey will be released.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you! Upcoming Meetings »