So this issue has been bugging me for a while, and I haven't found any info online that covers it specifically

I'm considering transferring (ACAT) an account containing both stocks and funds to another brokerage. How do you deal with using the specific identification method to sell shares, if the shares were initially purchased at another broker and the current broker (presumably) has no record of the purchase dates/cost?

I figure my records of the buy transaction would probably be good enough for the IRS come tax time, but don't I also need to identify the specific shares to my current broker at sell time? I can picture trying to (painfully!) explain this to a customer service rep...

I have this mental picture of Dilbert's accounting trolls sitting around the IRS offices cackling wickedly and saying "Yeah, the taxpayers will all limp around in circles dragging one wing trying to figure this one out!"

I don't know whether the new & old brokerages will cooperate with their specific funds, but you could try to transfer your assets "in kind" without any buying or selling of stocks or funds. That avoids the whole question.

If the current broker doesn't have any basis info then it's not worth the trouble of trying to tell them how to identify specific shares that seem (to them) to have the same date. So just decide whatever you want to sell, tell them how many shares to sell, and keep your own records. If it'll help you sleep better at night then fax them a letter explaining the situation and what you're doing about it. No doubt they'll shred it carefully file it away and have it ready for reference if the IRS ever asks for the info.

I'd love to read about any case where the IRS took a taxpayer to task over the specific shares issue.

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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
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One of my online brokers does not allow specific identification of shares or lots when selling. So I just print out the transaction and write on it which shares I sell. I am told by another message board of accountants that woe is me should the IRS audit me. Now I could call up the broker and make the "versus purchase" trade for a horrendous commission, but I just don't care enough to do that.

Yeah, I'm trying to avoid the issue by not selling for as long as possible. And I too would be very interested to hear about any actual cases where this was an issue with the IRS! I want that warm fuzzy feeling of knowing everything's taken care of.

I put through about 20-25 ACATS transfers a week.


The receiving firm will have the specific lot ID as an option on their ACATS form

From the IRS point of view I believe they say that you are required to have written confirmation from the broker that identifies the lot or lots that you are selling. Many brokers, especially discount brokers, simply won't do this and say it is up to you to keep track of your basis. I believe some brokers will also allow you to provide them with basis information for your portfolio if you moved it from somewhere else and they didn't get that information at the time of the transfer.

From a practical point of view, I believe if you have "sufficient" documentation of your basis that will work in the case of an audit. But I am not an accountant, yadda yadda yadda...

2Cor521

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"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.

There have been exchanges about this on the Diehards board, and it seems as no one on there has been audited on this particular issue. Some have had luck getting a reply from their brokerage, others have not.

Technically, you are supposed to pre-notify the brokerage firm about which lots you intend to sell, and receive a reply from them that they received your correspondence. The reply does not have to say anything beyond that they received your correspondence. You should have a copy of the original correspondence for your records. I think an email from within your account (some brokerages have this feature for asking questions about your account) and getting an acknowledgement would suffice for this requirement.

In cases where I did not get an acknowledgement, I would use specific ID anyway, and record it in my records. Also, when I have done tax loss selling, I try to match exact lot size to make it obvious. So if I bought 210 shares 5 years ago and want to sell now, I will sell all 210 shares at once. I usually won't break up a purchase like that from the past.

This is the really the BEST way to sell off your equity holdings. Any other approach will have you paying more taxes sooner. For many folks on this board, we are talking big money in tax savings using specific ID. Not doing this is one of the most common errors that investors make. And if you use average cost basis, you are stuck using that technique for the life of your fund/stock ownership.

Kramer

When we transferred some stock to fidelity, we supplied the basis for different groups of shares on a piece of paper, and Fidelity set up the records from our notes. Fidelity will accept a customer supplied basis - at least for stock. Call your brokerage and ask them how to do this.

When we sell shares, Fidelity always gives you an option to select which block of shares you are trading.

For our mutual funds we just use average cost basis, so selecting which shares is not important.

Fidelity does note in their cost basis that it was "customer supplied".

Audrey

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Retired since summer 1999.

You have to stick with whichever technique you start with.

And selling specific shares gets pretty old after a few years of six-page Schedules D. But we'll stick it out until we're done.

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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
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I don't spend much time here— please send a PM.

Nords, only average cost basis locks you in forever, according to the IRS rules.

Any technique besides specific ID would cost me 10's of thousands in today's dollars over my lifetime. And for someone planning to leave an inheritance (even to a spouse), it could cost them much more. I don't plan to sell my earliest purchased shares for 40 years.

Vanguard and Scottrade do not seem as friendly about this as Fidelity, but Vanguard apparently will often provide the notification back so as to satisfy IRS rules.

I would only use average cost basis on a bond fund with more or less static value, since the technique won't make much difference in that case.

This is an important enough issue to be a major factor in which brokerage you utilize.

Kramer

Hunh, I stand corrected. I never read it with that interpretation, and the articles I remember also gave the impression that you had to stick with the method you started.

But one could gain the impression from Pub 564 (http://www.irs.gov/publications/p564/ar02.html#d0e1244) that you could sell a few specific shares, then change your mind and sell the rest by average cost basis.

__________________
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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.

I thought you weren't allowed to use average basis for stock shares. I thought if you didn't specify a lot, that it was assumed you were using FIFO. So what kramer says above I think is partially untrue.

I do believe the default for mutual funds is average cost basis (single category method).

2Cor521

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"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.

My understanding is that the default method is always FIFO. I know of no restrictions on using average cost basis, but I am at work and you guys are retired and able to do research during the day

My main advice is to never, ever use average cost basis except in certain limited cases where you really understand what you are doing and the complexity tradeoff is reasonable.

Taylor Larimore (in his 80s) is sort of the old wise man of the Vanguard Diehards board, and he generally gives conservative and wise advice. His mantra is always to keep is simple, very simple, even if it costs you a little in return or diversification. But even Taylor lamented last year that this is one area where he truly regrets keeping it simple. His decision to use average cost basis instead of specific ID is probably going to cost his heirs well into 6 figures.

Kramer

From a post I wrote a year ago:
http://www.raddr-pages.com/forums/viewtopic.php?t=2151

Note that Brown is gone now, and TD Waterhouse has merged with Ameritrade.

As Audrey says above, Fidelity seems good for specific id for stock.

Not sure about Wellstrade, for stock or mutual funds. Anyone know?

The way I look at it, the intent of the IRS rule is to prevent you from changing your mind retroactively about which shares you sold. So any strategy that gives you a record of your intents at the time is acceptable. I just write it on a sheet of paper that I put in the folder with my other tax records for the year. I suppose if you wanted to be a little bit more by the books you could email your broker and print out the sent email with the date. Probably doesn't meet the letter of the law but if a broker can get to be the size of Vanguard without complying, I figure l'm fine.

The way I look at it, the IRS has much bigger fish to fry than worrying about this piddliness. As long as you have good records, it seems to me unlikely that they would penalize you.

I have to admit that is more or less my strategy. Several decades I sent Schwab a letter stating that when selling my Intel shares, I would be selling the most recent shares first (i.e LIFO) for any stock held longer than one year. I doubt that have a copy of the letter, cause I'm not sure I even I could find a copy.

I do keep a pretty detailed spreadsheet identifying the regular and AMT (God I love our tax code) cost basis for my dozens of acquistions of Intel stock.

What is "AMT cost basis" ?

Thanks

AMT cost basis.

I am not sure you really want to know.. but

Normally when an employee exercises an Incentive Stock Option (ISO) the difference between the strike price and the fair market price is not treated as income. If the employee holds the stock for one year the difference between option price and the sales price is treated as a long term capital gain, if he holds the stock for less than year every thing is treated as ordinary income.

So for example your employeer DotComX grants you options on 5,000 shares at $10 a year that vest each year for the next 5 years.
After couple years the company goes public. In Jan 2007 the stock is $50 and you exercise a 1000 share @$10/share, if you sell now you have $40K in additional income you could quite possibly be pushed into the 33% bracket and pay $13K in taxes. If however you you wait until Jan 2008 to sell you'd only owe LT Gains @15% on the profit or $6K. Of course the stock may not be selling at $50 a share so you are taking a risk.

However, the AMT tax system treats any gain of employee stock options as income for AMT purpose. So when computing your AMT taxes you'd have $40,000 ($50-$10) in AMT income. In this situation you often owe more tax under the AMT system, and Uncle Sam demands the higher of regular or AMT Tax. Now if we go back to the 2000, when the dot com bubble burst, it was reasonable common to see this situation. In Jan 2000 the stock would be worth $50, and by Jan 2001 when the year holding period was up the stock was worth $20 (and often much less). In this situation you have $10,000 in LT Gains. However, Uncle Sam has already collected $40,000 in AMT taxes on your stock, hence when calculating your AMT tax the next year, you get to subtract the loss $30,000 ($50-$20) from your AMT income for that year. (Some dotbomb employees got horribly screwed (not me) in this situation but that is beyond the scope of my post)

I won't bore you with the detail, but very slowly Uncle Sam lets you get a refund on the excess AMT taxes you paid in the form of a AMT tax credit after about 10-12 years I expect to exhaust my AMT credit, meanwhile Uncle Sam has had a free loan.

Thanks very much for the post. Actually I do have some ISO options with Megacorp - haven't exercised any, and I'm in "AMT land". - so this is something else I need to track.

I'm assuming that the "AMT cost trap" only occurs if the price drops during the 1 year hold period.

Thanks again.

Yes and no. The trap occurs only when the stock drops but.. if the stock rises from $50 to $70 for AMT purpose you will have an additional $20,000 in income which may reduce your AMT exemption amount.

BTW, Congress last year passed some legislation that helped those people with unused AMT credits (including me.)

In addition the standard disclaimer. that AMT is ridiculously complicated so consulting a CPA is probably in order,
Fairmark as always has a great writeup and very knowledgable board. http://www.fairmark.com/amt/index.htm.