Question of the Week

Sheila is a registered representative with YTR Investments. One of her clients, Dorothy, has been investing in the XYS Growth Fund for about 12 years. Dorothy calls Sheila and requests that she put in an order to redeem 500 shares of XYS, which has shown significant NAV appreciation in the past year. She then asks for Sheila’s advice regarding how she should report the sales for tax purposes. The most advantageous method would probably be which of the following?

a) First in, first out (FIFO)
b) Share averaging
c) Identifying shares
d) Fixed-dollar


The correct answer is c).

If the shareholder does not specify a choice, the tax law assumes that the shareholder is selling the first shares acquired, FIFO. This would, particularly in the scenario above, mean a greater tax liability to the seller. Identifying the shares gives the investor the ability to choose which shares, usually the most expensive, to sell first. Share averaging is a common method for those who do not wish to be involved in detailed tax planning.

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