Cost Basis--FIFO vs LIFO

I understand shareholders can calculate their cost basis based on ether the FIFO or LIFO methods. On my latest brokerage statement I noticed that the gain on a recent stock transaction was calculated based on FIFO ? significantly increasing my tax liability.

I?m told that absent any specific instructions, the brokerage will use the FIFO method, regardless of any tax considerations. Interestingly enough, I do not recall ever being asked whether I had any preferences for any of these methods.

Is it too late to calculate the above-mentioned gain using LIFO? I other words, would the brokerage agree to change the cost basis from FIFO to LIFO?

Also, as far as my tax return is concerned, do I have any discretion on how the cost basis is calculated (regardless of what the brokerage statement says)? I?m afraid that if the brokerage doesn?t go along, but my tax return shows capital gains calculated on the more advantageous LIFO basis, the IRS may side with the brokerage.

I appreciate all your input, Dave

Reply to
Dave
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In order to determine your cost basis using specific idenification of shares traded, you must notify the broker of which shares you intend to trade at the time of your order. And the broker should acknowldge this instruction.

After the fact it's too late, and FIFO is assumed.

The broker is not under any obligation to ask you which shares you wish to trade at time of trade, so it's all up to you to make this notification at time of trade and make sure the broker acknowledges.

Reply to
Arthur Kamlet

Art is right, of course. I use Schwab, and just sold some ETF shares in an account. When entering the trade, it gave me a number of options. FIFO, LIFO, lowest cost, highest cost. Highest cost offered a loss, which would allow this woman to have an extra (up to) $3000 she can convert to Roth from her traditional IRA. FIFO or low cost would have produced a cap gain, which get step up when she passes. (I am just a Schwab client, no relationship, other than that.)

Joe

Reply to
JoeTaxpayer

Not true.

Absent a designation made prior to sale to your broker and acknowledged by your broker, you are stuck using FIFO, like it or not. (Starting in 2011 you can also have standing designations on file with your broker, but those only apply to sales made after the standing designation was made).

There are two parallel things going on here:

1) The actual tax rules that apply to you, regardless of what the broker reports. The tax rules always supercede what the broker reports, especially since what the broker reports isn't guaranteed to be correct and in fact in some cases cannot possibly be correct (for example, if your activity in an account at a second broker causes wash sales in your account at the first broker).

The tax rule says that unless you made an identification at or before the sale and the broker timely acknowledged that identification, you are deemed to have used FIFO, whether you like it or not.

2) The rules the broker has to follow when reporting basis on the 1099-B forms it'll issue in early 2012 for tax year 2011.

Based on what "sell what shares" designations you've given the broker (or the lack of any designation) your broker will compute and report the basis of the actual securities you have sold. The basis number will depend on the broker's record of the purchase price of the securities that were sold plus any basis adjustments (positive or negative) that the broker knows about. That is not necessarily the correct basis depending on what activity you have at other brokers.

Regardless of what the broker reports, you have to compute your gain or loss correctly, taking into account any cross-broker wash sales and other things that affected the basis of the sold shares. You cannot just take the basis reported by the broker as-is. If the real basis is different, you have to use the real basis. To be fair, for most people the reported basis will be the real basis and they can take the shortcut of just using what the broker reports.

Did you tell the broker to do otherwise prior to sale? If not, that's what they had to do.

It's not "will use", it's "required to use".

They don't have to ask.

Yes. The basis method can't be changed after the sale. It has to be chosen before or at time of sale, not after.

They shouldn't. And even if mistakenly they did that's irrelevant since tax law says you can't make that change.

No. Tax law says that if no designation was made by you and acknowledged by the broker before or at the time of sale, you are stuck using FIFO when figuring your gain for tax purposes.

You're not legally allowed to use LIFO given the facts and circumstances you've told us.

Reply to
Rich Carreiro

I've never noticed this field on my trading website, ETrade. Anyways, with regards to the original question, as this field is just a book- keeping measure, is it possible to change it retroactively? That is, the 2011 1099-B that the brokerage generates next year is all that matters.

Reply to
removeps-groups

No retroactive changes to basis.

Reply to
Arthur Kamlet

Just went into account Rich. As you said, default showed FIFO, and had an option to choose one of the other methods. I just requested "high cost" and this will be in effect 'next trading day,' not instant. If I had to trade today (we have 2-3 transactions a year, not more) I'd just override the FIFO manually.

Reply to
JoeTaxpayer

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