What is the Specific-Shares Method
The specific-shares method is a way for individual investors to manipulate their capital gains or losses when selling some, but not all, of their shares of a particular stock. The goal of the specific-shares method is to reduce tax liability in a given year, typically, by showing as large a loss or as small a gain as possible.
Breaking Down Specific-Shares Method
The specific-shares method can minimize the size of a capital gain or maximize the size of a capital loss, for tax purposes, when selling off shares of a company or fund. It works by choosing to sell specific shares when reducing one’s position in a stock. Selling the shares with the highest cost basis, i.e., the shares the investor paid the most for, will show a smaller capital gain or a greater capital loss, in either case reducing tax liability for a given year.
The specific-shares method only works if certain conditions are met. The method requires that the investor has purchased multiple lots of the same security at different prices, is selling only some of the investor’s shares in a stock and has kept a record of the cost basis of each stock or fund purchase.
Assuming all these conditions, the investor must give detailed information to the broker managing the investor’s account on which shares to sell. Otherwise, the average price paid for all shares of the same stock will form the cost basis, and the investor will end up with a greater tax liability than necessary.
Two Options Within the Specific-Shares Method
Though generally it is in the investor’s interest to choose the highest-cost shares to sell in the specific-shares method, there are exceptions. If the highest-cost shares were purchased within the last year, choosing to sell them in the specific-shares method would count as a short-term capital gain, which is taxed at income-tax rates, rather than the lower capital gains rate. In such a case, the investor would choose the highest-cost shares among those purchased a year ago or more.
Another situation in which an investor would deviate from the typical strategy occurs if the investor’s taxable income including long-term capital gains falls under a certain threshold. In 2018, the number is $38,600 for individuals and $77,200 for joint filers. Under that threshold, long-term capital gains incur no tax. In that case, the investor may choose to specify shares with the lowest cost basis in order to maximize the gain on paper and take the greatest advantage of the 0% tax rate, leaving the highest-cost shares in the portfolio to be specified when it is most beneficial.