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
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.