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I need help understanding the correct way to report says of stock this year. Here is my situation:

(1) 7/5/96 ... bought 100 shares of Donna Karan (don't ask why). Total cost (with commission) was 2829.00.

(2) 7/14/97 ... DK is in the toilet ... bought 500 shares more. Total cost was 5456.88.

(3) 7/29/97 ... DK jumps up briefly. I wasn't Foolish at the time, so I get really excited. I sell 500 shares. Total proceeds (minus commission) was 6193.87.

So ... as I see it, there are three strategies here. I don't know which would be better, or which are even legal. So let me know what I am supposed to do here:

(a) Report the sale as being just the 500 shares I bought two weeks earlier. This makes a short-term gain of 736.99.

(b) The proceeds come to 1358.774 per hundred shares. Report the sale of my 100 shares long-term at a loss of 1470.23 (1358.77 - 2829) and the sale of 400 shares short-term at a gain of 1069.60 (5435.10 - 4365.50).

(c) Lump the short- and long-term shares together, getting an average cost basis of 1380.98 per hundred shares. Report the sale of my 100 shares long-term at a loss of 22.21 and the sale of 400 shares short-term at a loss of 88.82.

I should mention that I have other long-term gains to offset, totalling a little over 2100. I'm in the 28% tax bracket. What should I do? What CAN I do?

==> david
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Dear GlowingFire,

I 'just happenned' to have a researched this topic recently, even called the IRS taxpayer hotline which pointed me to the exact line in the IRS pub 550 (page 29.30) dealing with "specific lot" identification.

The official IRS policy is that UNLESS you have a written confirmation from your broker indicating exactly which lot of shares were sold, then you have to report sales on a first-in, first-out basis. IN your case, this seems the most 'tax advantagious' in any case.

From your examples, it seems that (b) {long-term loss on first 100 shares, short-term gain on 400 shares} is the only possible method UNLESS you have specific written confirmation from your broker that you sold the 500 shares purchased in July 97.

{More details can be found on AFQ and Discount Broker boards within past 10 days, but since there are no longer message numbers, I can't be more specific}

Good Luck
- DD
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<<I need help understanding the correct way to report says of stock this year. Here is my situation:

(1) 7/5/96 ... bought 100 shares of Donna Karan (don't ask why). Total cost (with commission) was 2829.00.

(2) 7/14/97 ... DK is in the toilet ... bought 500 shares more. Total cost was 5456.88.

(3) 7/29/97 ... DK jumps up briefly. I wasn't Foolish at the time, so I get really excited. I sell 500 shares. Total proceeds (minus commission) was 6193.87.

So ... as I see it, there are three strategies here. I don't know which would be better, or which are even legal. So let me know what I am supposed to do here:

(a) Report the sale as being just the 500 shares I bought two weeks earlier. This makes a short-term gain of 736.99.

(b) The proceeds come to 1358.774 per hundred shares. Report the sale of my 100 shares long-term at a loss of 1470.23 (1358.77 - 2829) and the sale of 400 shares short-term at a gain of 1069.60 (5435.10 - 4365.50).

(c) Lump the short- and long-term shares together, getting an average cost basis of 1380.98 per hundred shares. Report the sale of my 100 shares long-term at a loss of 22.21 and the sale of 400 shares short-term at a loss of 88.82.

I should mention that I have other long-term gains to offset, totalling a little over 2100. I'm in the 28% tax bracket. What should I do? What CAN I do?>>

Sometimes I think I'd like to chuck the lawyer life and make a living somewhere teaching tax law. If I do, I may use this example as a test question.

Dow Danny gets half credit for his answer. He correctly points out that if you didn't specify which shares you were selling, you are deemed to have sold the shares you bought earliest, assuming you are dealing with a stockbroker and don't hold physical certificates. So you sold the original 100 shares for a long-term loss, and 400 of the newer shares for a short-term gain.

But there's another rule that comes into play: the wash sale rule. This rule disallows a loss on a sale of stock if you bought identical stock within the 61-day period beginning 30 days before the sale and ending 30 days after the sale. Your loss sale occurs less than 30 days after you bought identical shares (which you kept). So you are required to report short-term gain on the 400 newer shares, but you are not permitted to deduct the loss on the other 100 shares. If you are sufficiently philosophical you will note that this is better than having to report gain on all 500 shares.

To receive extra credit, a student would have to explain the further consequences of the wash sale. Your replacement shares now have a basis that is increased by the amount of the disallowed loss. If my arithmetic is correct, those shares had a cost basis of $1,091.38 (one-fifth of the 7/14/97 purchase). Add to that amount the disallowed loss of $1,470.23 (if that is the correct loss, see below) and you get a basis of about $2,562. The upshot of this is that your disallowed loss is "preserved" so that when you sell the replacement stock it will provide you with a loss (or a decreased amount of gain, if DK bounces back).

Your holding period on the replacement stock relates back to when you bought the original shares. You can't get a short-term loss by selling these shares. If you sell them for a gain, that gain will qualify for the 20%/10% rate for property held more than 18 months.

I should perhaps point out that your calculations are off, as you can easily see from the fact that your computed gain on 400 shares is greater than your gain on 500 shares. You have used $6,193.87 as your sale proceeds in one calculation and $6,793.87 in the other.

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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Mea culpa (again !)...
KAT is 100% correct that I blew it in not noticing the application of wash-sales rules becasue of the 2nd buy/first sale happening within 30 days. Oops.

As always IRS publications are good sources:

Identifying (or not) specific shares to be sold: IRS Pub 550, page 39. {indicating that you must use First-In, First out}

Wash sales (with some worked examples) : page 49 {indicating that your remaining 100 shares acquire a new basis equal to their cost basis + the disallowed loss}
(page 50 describing how to enter the wash sale on your sch D, page 59 shows how to compute holding period ... in your period it extends from original Jul 96 buy.)

Nice heads up KAT.

In my house, I just leave all these questions to my wife, who never gets it wrong (and immediately told me why I was wrong here and calculated the new basis in her head while I read the original post out loud... Geez !)

- DD
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Many thanks to KAT and DowDanny for their help with this one. Sorry about the arithmetic errors, I was beginning to fade after a few hours of poring over the truly horrible tax report provided by Fidelity. They not only didn't say anything about when I bought any of the stock I sold last year, they didn't address this particular problem at all.

Anyway, to recap (and now using a spreadsheet and a night's sleep to look at this one more time) ...

(1) The 100 shares I bought in July 1996 have a cost basis of $2829.00;
(2) 400 of the shares I bought in early July 1997 have a cost basis of $4365.50 (4/5 of the overall cost of $5456.88);
(3) The 100 shares I have left were therefore bought for $1091.38;
(4) I sold 500 shares in late July 1997 for 6193.87, which breaks down to $1238.77 for the 100 long-term shares and $4955.10 for the 400 short-term shares;
(5) Thus I should report a long-term loss of $1590.23 ($1238.77 - $2829.00), none of which is allowable under the wash sale rules;
(6) And I should report a short-term gain of $589.59 ($4955.10 - $4365.50);
(7) This leaves me with 100 shares with a cost basis of $2681.60 ($1091.38 + 1590.23), and the effective purchase date on these shares is July 1996, for purposes of calculating gains and losses when I get around to selling them.

Is all of this correct? I know that in some cases I'm just parrotting what you guys wrote, but I just want to be sure that I understand.

One last question. My software did ask whether these were normal sales or wash sales (or a few other things besides). Are these both considered wash sales (to explain why I'm not taking the loss on the long-term sale), or is just one or the other the actual wash sale?

Thanks again for all of your help.

==> david
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<<In my house, I just leave all these questions to my wife, who never gets it wrong (and immediately told me why I was wrong here and calculated the new basis in her head while I read the original post out loud... Geez !)>>

Does my wife have a twin I don't know about???

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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Your numbers look about right to me on a quick pass, but to really be certain you should check with Danny's wife. <g>

As to what constitutes a wash sale, only the sale of 100 shares at a loss is a wash sale. The other sale is not a wash sale for two reasons:

1. Wash sales are for losses only.

2. You don't have a wash sale when you don't hold replacement stock for the stock you sold. You hold replacement stock for the 100 shares you sold at a loss, but not for the other 400 shares.

Final comment: It would be nice if the Fidelity's of the world provided help with these issues, but that really isn't their job. All they have to report is the date of sale and the amount of sale proceeds. I'm not aware of any broker out there who will identify wash sales for you. Anyone know of one?

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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[[The official IRS policy is that UNLESS you have a written confirmation from your broker indicating
exactly which lot of shares were sold, then you have to report sales on a first-in, first-out basis. IN
your case, this seems the most 'tax advantagious' in any case.]]

While that may be the official IRS position, the courts are not quite in agreement. For a discussion of the specific identification method, see my post on that issue in the Taxes FAQ area. There really are loopholes that you can use without specific broker confirmations.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
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>Final comment: It would be nice if the Fidelity's of >the world provided help with these issues, but
> that really isn't their job. All they have to report >is the date of sale and the amount of sale proceeds.
> I'm not aware of any broker out there who will >identify wash sales for you. Anyone know of one?

At least on mutual funds, Vanguard does. They identified a wash sale for me that I didn't realize at all. I had transferred some money from a fund to an IRA, same fund. Thus I wasn't paying much attention to the share price and the idea of a wash sale never occured to me. However, when the paperwork arrived, they identified it as a wash sale--it had washed against shared bought with dividend reinvestment!
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