Last-in, first-out accounting of holding periods

There is something very wrong with it, based solely on what you've written. The default is FIFO unless you specify the shares you're selling AT THE TIME OF SALE and get WRITTEN confirmation from the broker.

You get an A for planning and an F for execution unless you got the necessary broker confirmations. BTW, if any of the sales was for a loss you may also have wash sale issues.

No

Consistency doesn't matter, and it's not dealer's choice. It's either FIFO or specific identification for each sale.

And now you know why.

See IRS Publication 550.

-- Phil Marti Clarksburg, MD

If you didn't instruct your broker to sell the more recent shares and if the broker didn't confirm receiving your instructions in writing, then you are forced to use the first-in, first-out method. You can't choose "after the fact" which shares to sell.

You can choose to sell shares in any order you want... provided you instruct your broker at the time of sale and he confirms in writing that he received your instructions. If you fail to do that, you must use the first in, first out method. Each sale stands alone.

They default to first-in, first-out because that is the method you are required to use unless you take the steps mentioned above. Ira Smilovitz

I have no idea how turbotax handls this, but LIFO is simply one of many possible ways to specifically identify, at time of sale, the shares you sell. You have to make this specific identification at time of sale and have the broker confirm it. Oherwise FIFO is deemed to be the way to account for which shares were sold.

According to IRS publication 550, chapter 4,

"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." [That is, first-in, first-out is the default unless ... ]

"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, and - Receive a written confirmation of this from your broker or other agent within a reasonable time" [That's how to deviate from first-in-first-out.]

Each security can be handled differently, as long as you follow the two steps above for each non-FIFO sale. That is, (a) identify which shares to sell when placing the sell order and (b) get the written confirmation.

I use Turbo Tax, and my recollection is that the user enters the sale date and purchase date of each lot sold. Tax software can't default to anything because it doesn't know about shares you haven't sold. (Maybe Quicken and similar products have the default you mention.) Disclaimer: I'm not a tax pro, just a taxpayer.

You can save even more by selling the most expensive shares, which may not be the last-in. Also, since shares held more than a year are taxed at a lower rate, you may be able to save more by selling long-term shares than short-term shares.

The only two options you have for accounting for stock sales are FIFO or specific shares. LIFO is just a particular case of specific shares, where you just happen to specify the youngest shares. In order to use the specific shares method you have to tell your broker which shares to sell, and get a written acknowledgement from the broker that they sold the designated shares. If you don't specify explicitly, you're assumed to be selling FIFO. So unless you've been making these explicit designations, there is definitely something wrong with your method. In the case of mutual funds you also have the option of using average cost basis accounting.

You can use different methods for different companies, and you can change the method for any particular company at any time. However, if you sell a mutual fund and use the average cost basis method you can't go back to specific shares or FIFO for that fund until you close out your entire position.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

No, as long as, when you placed each sell order, you told your broker which specific shares you were selling, and the broker confirmed the specific identification of the shares in writing within a reasonable time. If that was not done at the time of each sale, then you must use first-in, first-out. If you used the wrong method when you prepared your tax return for 2006, you will have to file an amended return.

There are really only two methods allowed for stocks: first-in, first-out, and specific identification. You can accomplish the same thing as last-in, first-out by keeping track of it yourself and using specific identification for each sale, but you can't tell the IRS that you are using last-in, first-out as a general method.

You can't decide what method to use when you do your taxes at the end of the year. To use specific identification, the two steps that I mentioned above have to take place at the time of the sale: your notification to the broker and the broker's written confirmation. If you didn't follow the specific identification procedure at the time of the sale, then by default you chose to use first-in, first-out.

No.

Yes, by using specific identification, as described above.

You don't even have to do that. You can use specific identification for some sales, and first-in, first-out for other sales of the same company. Of course you can't sell the same shares twice, so you have to keep careful records of what you sold when.

The software works that way because that's how the IRS regulations work. The default is first-in, first-out unless you took active steps to use specific identification.

One other comment: You refer to this as a method of determining your holding period. It's not clear whether you realize that it also determines the cost of the shares that you sold. The cost that you report for each sale is the cost of the particular shares that you sold, no matter which method you used to determine which shares you sold. So using one method or the other will affect the amount of gain or loss on each sale, as well as whether it is short-term or long-term.

Bob Sandler

For stocks, you really only have two options for determining the basis (and holding period) of stocks sold: First-in, First-out. This is the default and applies unless you do something differently. Designated Shares. This will apply if you specifically identify which shares are sold. This allows you great flexibility, since you can choose the last-in, first-out strategy or any other mix. There are, however, two important things that need to be done in order for you to use this method -- and which may make it too late if you've already sold: 1. You must identify and designate the share to be sold at the time of sale. 2. The identification must be on the broker confirmation of that sale. As far as I know, you can freely switch between these two methods at any time. For mutual funds, there is another option (average cost), but that doesn't apply to direct ownership of company stocks. It is also a method that IIRC, once used, needs to continue being used until all of that particular mutual fund are sold.