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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Re: capital gains & quarterly investing Date: 7/9/1999 3:21 AM
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"understand the difference between short term and long term capital gains (hours and hours of reading on this site). I will be adding money to my portfolio on a quarterly basis. When I sell, will I have to separate the shares of a stock I bought more than a year ago, from the ones I bought since? (for taxes) "

It depends on what your plans are. Let's say you buy 100 shares of a company every 3 months for 18 months, but then a month later you decide to sell all 600 shares at once. That is fine. When you fill out your tax forms, put a section for each buy, and split up the sale price on a per share basis (to be safest you probably have to split the brocker fee too, but it won't matter too much). Just put the 2 that were long term (at least a year and a day) in the long term, and the others in the short term section. Not too hard.

The dificulty starts to appear if you don't sell them all at once. For instance you sell 300 shares at the 19 month date you sold in the other example, and then sell the other 300 9 months later. This is where specifying a stock comes into play. If you do nothing, First in First out (FIFO) takes affect, so it is assumed that when you sold the first chunk of 300 shares you sold the first 300 you bought. Thus you pay long term capital gains on the profits from 200 shares and short term onthe profits from 100 shares.

That makes sense, but what if you didn't plan on selling the other 300 shares right away. If you bought the different shares at different prices, it might be advantageous to specify which shares of stock you wanted to sell. Additionally, if you pick the most recent 100 as your short term gain 100, then 9 months later when you decide to sell the last 300 from your portfolio all will be Long Term gains, instead of 200 LT and 100 ST as it would be if your 2 sales just used FIFO.

But, specifying a stock is a bit of a pain. I won't go into it her, but rather refer you to where I read all about it yesterday.

I did a search of this group for specifying stock, and then FIFO, which should give something like 15 and 21 older messages respectively. Then there's the 4 or so threads from my post titles "specifying stock update?" starting yesterday. I also read the page at http://fairmark.com/buystock/ident.htm and the brokers section, which pretty much tells all. But first hit the tax FAQ here at fool.com....it does a pretty good job.

Once you do all of that you can go onto the irs page and read the code....the part of intrest (and on intrest too) is at http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p550toc.htm, and you want chapter 4.

Hope that helps, and that it isn't too overbearing. I read all this stuff yesterday in something like 2 hours and feel I am nearly an expert in it now, so it's not that bad. And if it saves you several thousand dollars in taxes like it might for me it's definitly worth the time and effort. As they say hear, Fool on!

Aaron

(BTW, I'm a new Fool too, though I've been trading for 18 months now with great success. I strongly suggest that you read The Unemotional Investor. It's a Motley Fool book, and I just finished reading it last night (trust me, don't read it before going to bed if you want to be able to fall asleep). I had a my best day ever in the market today, making 12k, mainly from AAPL...but I do have more risk than the portfolio's that are presented there, and so will be moving part of my portfolio to this structure. Higher risk is fine in some situations, but I need to start locking in my fund, at least a little. Basically, I strongly suggest reading it. Check it out from the library and save a few bucks....but you'll probably end up buying a few copies to give to people you know like I plan to do. Sorry for the off topic stuff, but at some point you'll be glad I included it)
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