Dear TMF,

Question for you regarding specification of stock.

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?

With the prevalence of online brokerages nowadays, this will probably be more of a problem in the future, no? Especially since many online services, like mine, don't even give clients the option of specifying lots on their sites.

Anyway, thanks in advance for your help. This message board is a *great* service!

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.

As I understand it, the reason you don't have to specify shares on the web is that is doesn't matter.

Just list the shares with the old purchase date under long-term capital gains and list the new shares under short-term capital gains and losses.

Gary the PhotoPhool

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?

Write the letter to the broker, the letter should be sent ASAP. This specificaly identifies the shares.

I would also note that you made a mistake and that you closed the position when you realized the mistake. They could care less but you have your documentation for the IRS if you were audited. Also keep your confirmations.

You should not have any problems if you act now.

Note, you do not file the letter with your return.

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

Bob,

Thanks for the response! (Gary too.) I hadn't thought about the wash sale rule. But to tell you the truth, the short-term loss is so small, that it wouldn't much matter to me if I wasn't able to claim it. If I'm forced to use FIFO, however, the cost of this "little" mistake will be twice as much as I had originally thought. Not good. :-(

Thanks for the response! (Gary too.) I hadn't thought about the wash sale rule. But to tell you the truth, the short-term loss is so small, that it wouldn't much matter to me if I wasn't able to claim it. If I'm forced to use FIFO, however, the cost of this "little" mistake will be twice as much as I had originally thought. Not good. :-(

On the up side, if you're forced to use FIFO the mistake will not cost you any more than you'd have to pay eventually. You'd just have to pay the accumulated capital gains this year instead of in the future.

Thanks for the tip Bob. I found more information on FIFO and specific identification of stock at the Tax FAQ http://www.fool.com/school/taxes/taxes23.htm

I'm not a tax lawyer but here's my two cents worth. The circumstances of your trade mistake make it fairly obvious you were just correcting an error. And unless you're talking thousands of shares, it wouldn't be worth an auditor's time to contest the issue.

I'm not sure the wash rules apply here. They would apply if you had sold and repurchased. However, you bought and sold. So your original shares remained intact until the final sale.

Gary the PhotoPhool

PhotoPhool writes (in part):

I'm not sure the wash rules apply here. They would apply if you had sold and repurchased. However, you bought and sold. So your original shares remained intact until the final sale.

I reply:

The wash sale rule applies to a purchase within 30 days before or after a sale for a loss. This prevents clever folks from avoiding the wash sale rule by doubling up on a stock for a short time. --Bob

PhotoPhool writes (in part):

I'm not sure the wash rules apply here. They would apply if you had sold and repurchased. However, you bought and sold. So your original shares remained intact until the final sale.

I reply:

The wash sale rule applies to a purchase within 30 days before or after a sale for a loss. This prevents clever folks from avoiding the wash sale rule by doubling up on a stock for a short time. --Bob

Bob,

That's a very good point I missed.

Some smart people would think of using a purchase to double up on shares before selling the original shares--thus ending up with the same amount of stock yet creating accumulated capital gains/losses for this year's taxes.

Since there are smart people like yourself around, the IRS was wise to create wash rules against using such transactions to create taxable events. :)

The wash rules do not forbit making such transactions, you just have to adjust the basis of the new shares rather than take the capital gains loss/gain this year.

This case is an unusual situation, and an interesting application of the wash rules. Correct me if I'm wrong in the following situation.

I believe that the wash sales rules would apply here only if the shareholder attempted to keep the accidently purchased shares and list the old shares as sold. However in this case, he sold the very shares he purchased three days before.

Thus no "new for old" stock switch occured and the wash rules should not come into play.

On another hand, by listing the old stock rather than the new he could use the wash rules to apply his loss against his remaining stock to lower his future capital gains. Would this be an advantage if he expects his marginal tax rate to go up in the future?

Gary the PhotoPhool

PhotoPhool writes (in part):

I believe that the wash sales rules would apply here only if the shareholder attempted to keep the accidently purchased shares and list the old shares as sold. However in this case, he sold the very shares he purchased three days before.

Thus no "new for old" stock switch occured and the wash rules should not come into play.

On another hand, by listing the old stock rather than the new he could use the wash rules to apply his loss against his remaining stock to lower his future capital gains. Would this be an advantage if he expects his marginal tax rate to go up in the future?

I reply:

It doesn't seem to me that either of your thoughts will fly. The IRS only cares about whether the assets are economically equivalent. Since new shares of AOL are economically indistinguishable from old shares of AOL, I don't think that the IRS will care whether the original poster made a "new for old" switch.

Moreover, the original poster had a gain, not a loss, on his sale of "old" shares, so if he identifies those as the shares sold, he has not had a sale for loss and the wash sale rule does not apply at all. The wash sale rule reduces (but does not eliminate) the advantage of designating the "new" shares -- he can't realize the loss, but at least he doesn't have to recognize the gain on the "old" shares he would otherwise have been forced to sell. --Bob