Specific Identification

Over several years Anselm Kirkbride accumulated Halloway Industries shares in three lots in one taxable account: 200 at $22, 300 at $38 and 200 at $61. The stock trades at $55 today and he needs to sell 200 shares while minimizing this year taxable gain. He should:

1. A.Elect the average cost method, which is available for individual stocks and would produce the smallest gainAverage cost is available for mutual fund and DRIP shares, not for individual stock positions.
2. B.Simply place the sell order, because the broker will automatically apply the highest-cost lot to minimize his taxThe default is FIFO unless he instructs otherwise. No such automatic optimization applies.
3. C.Specifically identify the 200 shares from the $61 lot at the time of sale and obtain written confirmation, producing a $6 per share loss instead of the gain that default FIFO treatment would createCorrect. Specific identification, made and confirmed at the time of sale, is the only way to override FIFO.
4. D.Sell the $22 lot, since the oldest shares receive the most favourable long-term treatmentAll three lots are long term. The $22 lot produces the LARGEST gain, which is the opposite of his objective.

Why: The default cost basis method for stock is first in, first out, which would sell the $22 lot and realize a $33 per share gain. To do better he must use SPECIFIC IDENTIFICATION: instruct the broker at or before settlement which lot is being sold and obtain written confirmation of that identification. Selling the $61 lot produces a $6 per share loss instead of a gain. Average cost is available only for mutual fund and dividend reinvestment plan shares, not for individual equities.

Xiomara Beltran holds four separate tax lots of Verrick Labs common stock bought at different prices in different years. She wants to sell 200 shares from the highest-cost lot in order to minimize her reported gain, rather than accept the default first-in, first-out treatment. To do that she must:

1. A.Designate the lot on her tax return when she files the following AprilAfter-the-fact designation on a return is not an adequate identification.
2. B.Identify the specific lot to her broker at or before the time of sale and receive the broker's written confirmation of that identification within a reasonable timeCorrect. Identification must be made no later than the sale and confirmed in writing.
3. C.Notify her broker any time before the trade settlesThe deadline is the time of sale, not the settlement date.
4. D.Nothing, because first-in, first-out is mandatory for individual stock positionsFIFO is only the default; specific identification is available if properly made.

Why: Specific identification is available only if the taxpayer identifies the particular shares to the broker at or before the time of the sale, and the broker confirms that identification in writing within a reasonable time. The identification cannot be made after the fact. If no adequate identification is made, the default rule applies and the shares are treated as sold in the order acquired, first in first out.