Specific Share Identification

What Is Specific Share Identification?

Specific share identification is an investment accounting strategy in which the investor means to get the most positive tax treatment while selling holdings inside an asset that were purchased at various times and prices.

Grasping Specific Share Identification

Specific share identification is an accounting strategy for investors who wish to upgrade their tax treatment while selling off their holdings in a specific company or fund which were initially purchased at various prices and various times.

Capital gains taxes are collected on profits produced using the sale of assets. An investor who purchases a share of stock at $10 and later sells at $20 will show a capital gain of $10, which is taxable. An investor who just makes a single investment in an asset won't benefit from specific share identification, since when they sell that asset, the acquisition price is no different for each share of that asset.

Another investor purchases 10 shares of a stock every year for three back to back years. Every year the per-share price, otherwise called the cost basis, increments by $10. In this scenario, the investor purchases 10 shares at $10 per share in year one, for a total investment of $100. In year two, the investor purchases 10 additional shares for $20 per share, and 10 shares in year three for $30 per share.

In the event that this investor decides to sell a portion of these assets the next year for $40 per share, the capital gains will vary marginally for each group of shares, and specific share identification can be a useful strategy for the investor to improve their tax treatment on those capital gains.

FIFO, Average Cost, and Specific Share Identification

The IRS gives several strategies to reporting capital gains, and these are portrayed every year in [Publication 550: Investment Income and Expenses](/irs-bar 550). Investors are encouraged to counsel the most recent publication for current regulations on capital gains reporting.

For most funds, First In, First Out (FIFO) is the default option for reporting capital gains on share sales. The assumption is that the first shares an investor purchases are the first sold. In our above scenario, on the off chance that the investor sells fifteen shares with FIFO in place, they will sell the 10 shares purchased in year one and five shares purchased in year two, showing taxable capital gains of $30 on every one of the first-year shares, and gains of $20 on every one of the second-year shares.

It is workable for certain investors to utilize the average cost method of accounting, which averages the cost basis for all shares in the portfolio, and taxable gains are calculated on that figure. In our scenario, the average cost basis for the three years' worth of assets is $20, thus the sale of 15 shares at $40 would bring about taxable gains of $20 per share.

As its name proposes, with specific share identification, the investor can pick what shares are sold. For example, they could sell each of the shares acquired in year three and five shares of those acquired in year two. They could sell five shares of every year's acquisitions or whatever other arrangement which the investor might think advantageous for their specific investment strategy.

Specific share identification considers greater flexibility, however it requires careful record-keeping. Furthermore, investors inspired by this strategy are instructed to know with respect to regulations in regards to the manners in which profits are taxed on assets that are held for shorter terms. Generally speaking, profits made on an asset held for just a year or less are taxed at a higher rate than assets that have been held in a portfolio for a longer term.

Advantages and Disadvantages of Specific Share Identification

The most fundamental advantage of utilizing specific share identification is that it permits investors to limit gains, amplify losses, or acknowledge long-term instead of short-term gains. These occasions will bring down an investor's tax bill. Moreover, utilizing the specific share identification strategy might empower investors to use tax-loss harvesting. Tax-loss harvesting happens when an investor sells shares at a loss to offset a capital gains tax liability.

One defeat of the specific share identification accounting method is that it requires the investor to be staggeringly careful in their record-keeping. Obviously, utilizing this accounting strategy can create the most tax-efficient outcomes. In any case, on the off chance that you have your brokerage doesn't give a decent UI to selling specific shares, you need to personally keep track of tax lots. Not all investors can commit that amount of opportunity to their investment strategy.

Features

• Specific share identification considers greater flexibility however requires careful record-keeping.
• Specific share identification is an accounting strategy utilized by investors who wish to improve their tax treatment while selling off their holdings.
• Specific share identification must be used by investors who are selling holdings of similar asset they purchased at various times and prices.