Tax Lot Accounting

What Is Tax Lot Accounting?

Tax part accounting is a record-keeping technique that follows the dates of purchase and sale, cost basis, and transaction size for every security in your portfolio, even on the off chance that you make more than one trade in a similar security.

BREAKING DOWN Tax Lot Accounting

Shares purchased in a single transaction are alluded to as a ton for tax purposes. At the point when shares of a similar security are purchased, the new positions make extra tax parts. The tax parcels are numerous purchases made on various dates at varying prices. Each tax part, in this way, will have an alternate cost basis. Tax part accounting is the record of tax parcels. It records the cost, purchase date, sale price, and sale date for every security held in a portfolio. This recordkeeping method permits an investor to follow each stock sale all through the year so s/he can come to strategic conclusions about which parcel to sell and while remembering that the type of investment tax to be paid will rely heavily on how long the stock was held for.

Tax parcel accounting is principally the record-keeping of tax parts.

For instance, accept an investor purchased 100 shares of Netflix in March 2017 for $143.25 and one more 100 shares in July 2017 for $184.15. In April 2018, the value of NFLX stock has ascended to $331.45. His first tax part has been held for over a year, yet the latest parcel has been held for less. The Internal Revenue Service (IRS) forces a long-term capital gains tax on the profit produced using the sale of a security held for over a year. This tax is more good than the ordinary income tax applied to capital gains on stock held for under a year. Assuming the investor chooses to sell, say 120 shares, how long the investments were held for must be recorded. Likewise, he must factor in the way that the more current tax parcel will have a more modest capital gain whenever sold, which might mean lower tax than that of the more established part.

In the event that he decides to sell shares from the March part, he will involve the First-In First-Out (FIFO) method of tax parcel accounting in which the first shares purchased are the first shares sold. In this case, the long-term capital gains tax will apply. Selling 120 shares will mean that his March acquisition will be sold, and the leftover 20 shares will come from the subsequent parcel. FIFO is generally utilized as a default method for those places that aren't comprised of many tax parts with changing acquisition dates or large price inconsistencies.

In the event that the shares sold are chosen for come from the July parcel, this decision will follow the Last-In First-Out (LIFO) method of accounting, and the realized gains will be taxed as ordinary income. On the off chance that he sells 120 shares, 100 shares will be sold from the July part and the excess 20 shares will be sold from the March parcel.

Other tax part accounting methods incorporate the average cost basis, highest cost, least cost, and tax-efficient harvester loss methods.

The goal of tax part accounting is to limit the net present value of current taxes by conceding the realization of capital gains and perceiving losses sooner.