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Financial Planning / Tax Strategies


Subject:  Re: Specifying Stock 2 Date:  4/3/1999  3:48 PM
Author:  Bob78164 Number:  13553 of 127616

NestEgg2 writes (in part):

Here's my situation. I own a few hundred shares of AOL, and all have been held for more than a year. Last week I went to sell a portion of my holdings, but accidentally *bought* shares instead of selling them. This was a very careless error I made on my internet account, one that I don't hope to repeat. And so, instead of waiting to get through to my broker to see if there was anything I could do, I sold twice the number of shares I had just bought. That would have brought me back down to where I had wanted to be.

My problem is that I don't want to take a long-term gain on the whole sale, because if I had done things right, I would have only sold half. Instead I would rather take half at a long-term gain and the other half at a short-term loss (the stock went down a couple of points before I sold). I called my brokerage (Discover) after the fact and asked them what I should do. They said there should be no problem with that, that I should be able to report it however I see fit next year. They could not specify shares for me at that point. They said that, if I had had a broker make the trade, I could have sold shares vs. certain purchase dates, but as I had already made the trade, it was too late. There is no mechanism through the web site for specifying shares.

What should I do? Is there any way I can retroactively (the trade is 3 days old at this point) stipulate my intentions? Should I write them a letter so that something is on file? Should I just claim it the way I'd like, and hope that it goes through? Is it too late to do anything?

I reply:

TMFTaxes is about a week behind (due to tax season), so I'll try my hand at your questions. I'm afraid I have to point out another problem not mentioned in your post. You've been bitten by the wash sale rule. Even if you had properly specified shares (and I think it's too late for that), you still wouldn't be able to claim the loss because your accidental purchase, which you sold for a loss, occurred less than 30 days before your sale and you still hold AOL shares.

In any event, you're stuck with FIFO. Shares must be specified before the transaction. The IRS has provided a "safe harbor," requiring you to (1) give your broker written instructions as to which lots to sell, and (2) get written confirmation from your broker that it followed your instructions. TMFTaxes has expressed the opinion that this is more than required. He believes it will be enough (if he is ever audited on this issue) to have sent to his brokers written instructions always to sell the shares with the highest basis. Do a search and I'm sure you can find some of his replies on this issue. I'm confident that three days after the fact is too late. --Bob
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