Specific-Shares Method

What Is the Specific-Shares Method?

The specific-shares method is a way for individual investors to control their capital gains or losses while selling some, however not all, of their shares of a specific stock.

The goal of the specific-shares method is to reduce tax liability in a given year, commonly, by appearing as large a loss or as small a gain as could really be expected.

Figuring out the Specific-Shares Method

The specific-shares method can limit the size of a capital gain or expand the size of a capital loss, for tax purposes, while selling off shares of a company or fund. It works by deciding to sell specific shares while lessening 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, regardless decreasing tax liability for a given year.

The specific-shares method possibly works on the off chance that certain conditions are met. The method expects that the investor has purchased various heaps of similar security at various prices, is selling just a portion of the investor's shares in a stock, and has tracked the cost basis of each stock or fund purchase.

Accepting this multitude of conditions, the investor must give definite information to the broker dealing with the investor's account on what shares to sell. In any case, the average price paid for all shares of a similar stock will form the cost basis, and the investor will wind up with a greater tax liability than needed.

Decisions Within the Specific-Shares Method

However it is generally in the investor's interest to pick the highest-cost shares to sell in the specific-shares method, there are exemptions. In the event that the highest-cost shares were purchased inside the last year, deciding to sell them in the specific-shares method would count as a short-term capital gain, which is taxed at income-tax rates, as opposed to the lower capital gains rate. In such a case, the investor would pick the highest-cost shares among those purchased a year prior or more.

One more situation in which an investor would stray from the common strategy happens on the off chance that the investor's taxable income including long-term capital gains falls under a certain threshold. In 2021, the number is $40,000 for individuals and $80,000 for joint filers.

However it is generally in an investor's interest to pick the highest-cost shares to sell in the specific-shares method, there are exemptions.

Under that threshold, long-term capital gains cause no tax. In that case, the investor might decide to determine shares with the least cost basis to augment the gain on paper and exploit the 0% tax rate, passing on the highest-cost shares in the portfolio to be indicated when it is generally beneficial.

Features

• Selling the shares with the highest cost basis (the shares for which the investor paid the most), shows a smaller capital gain or a greater capital loss, diminishing tax liability for a given year.
• The specific-shares method can limit the size of a capital gain, or boost the size of a capital loss, for tax purposes, while selling off shares.
• The specific-shares method is a way for individual investors to control their capital gains or losses while selling some, however not all, of their shares of a specific stock.
• The goal of the specific-shares method is to reduce tax liability in a given year by appearing as large a loss or as small a gain as could be expected.
• The specific-shares method expects that the investor has purchased numerous bunches of similar security at various prices, is selling just a portion of the investor's shares in a stock, and has tracked the cost basis of each stock.