The IRS has reminded taxpayers to report digital asset income on 2023 federal tax returns, with an updated question now on Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return...
For purposes of the new clean vehicle credit and the used clean vehicle credit, the IRS has extended the deadlines for submitting seller reports for vehicles placed in service in 2023 and ea...
For purposes of the low-income housing credit, the IRS concluded that additional housing credit dollar amounts (HCDAs) for 2021 and 2022 that are returned to a state housing agency may be realloca...
The IRS has underscored the vital importance of selecting a tax professional carefully to safeguard personal and financial information. Taxpayers bear legal responsibility for their income tax...
The Financial Crimes Enforcement Network (FinCEN) issued guidance on inflation adjustments to its civil monetary penalties as mandated by the Federal Civil Penalties Inflation Adjustment...
For personal income tax purposes, Massachusetts clarified that when determining whether a taxpayer qualifies for no tax status and limited income credit, Massachusetts adjusted gross income should not...
The Rhode Island Division of Taxation has issued guidance regarding electronic filing of the Rhode Island Form 1065 for tax year 2023 (RI-1065). This guidance states that for tax year 2023 only, singl...
Gain or Loss
Gain or loss is the difference between your amount realized and your adjusted basis in the property. In the case of a short sale, the amount realized will be the amount of the agreed upon sale price. In the case of a foreclosure, assuming the lender discharges the balance in foreclosure, the amount realized will generally be the amount of the debt. Special rules apply to debts not fully discharged and to nonrecourse loans. Please consult your tax advisor for more information.
Your adjusted basis in property is generally the amount you paid at purchase, plus improvements, less depreciation claimed.
The rules for the taxation of gains and losses will generally fall into one of three categories:
Personal Residence – Gain is taxable as a capital gain, unless excluded under IRC Section 121. Loss is not deductible.
Investment – Assuming that the property is a capital asset, gain is treated as a capital gain, subject to rules for holding period and subject to depreciation recapture, if applicable. Loss is a capital loss and is subject to capital loss limitations.
Trade or Business – Assuming the property is primarily held for sale in a trade or business, gain or loss may be treated as ordinary income or loss. The majority of cases we currently see involving short sales and foreclosures are properties that have been acquired in more recent years. These troubled situations usually involve a decline in market value that no longer makes the home or investment viable. As a result, property owners are often faced with a loss on the property.
However, sellers should be wary of properties that, even in this declining market, have appreciated in value since acquisition, properties acquired using a like-kind exchange, and properties that have been depreciated for a number of years. Real estate owners with such properties should consider a 1031 tax-deferred exchange prior to the short sale closing or foreclosure.
Sellers should understand whether or not there is a gain or loss on a short sale or foreclosure prior to completing a transaction. A gain may be yet another financial burden in an unpleasant situation. More importantly, a loss on a short sale or foreclosure may be significantly limited depending upon the type of property. In the case of a loss, advanced planning is critical to mitigating a potential mismatch of COD income and loss treatment.
Cancellation of Indebtedness (“COD”) Income
If a property is sold in a short sale, or if a lender forecloses, and the debt is recourse debt, the property owner may have COD income to the extent that the fair market value of the property is less than the unpaid face amount of the debt. COD income is treated as ordinary income and lenders are required to send a Form 1099-C, Cancellation of Debt (COD), reporting the amount of income.
Fortunately, there may be relief available for certain homeowners. Pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, COD income arising from the discharge of “qualified principal residence indebtedness” may be excluded from income.
In addition, there are special rules for the taxation of other COD income. Most notable of the rules are that COD income may be excluded or partially excluded from income if you are insolvent when the debt is cancelled or if the debt is discharged through bankruptcy.
If neither the exclusion for qualified principal residence indebtedness nor COD exclusion rules apply, COD income from many short sales and foreclosures will result in ordinary income.
Income Mismatch
For investments that have turned bad due to the real estate market decline, many short sales and foreclosures may match ordinary income from COD income with limited capital loss deductions.
In fact, we have recently encountered a number of cases involving real estate investment schemes causing this type of problem. In these cases, investors with strong credit have been mislead by promoters of these investments to obtain little or no money down mortgages with the prospect of selling the properties in the near term. Often times, the promoters will offer to find subsequent buyers, to rent the units, or to rehabilitate the properties for future sale as part of the investment scheme. Due to the real estate market decline, these investment schemes have failed and investors are left with properties that are significantly below the amount of mortgages obtained. Investors are often left with no other option than a short sale or lender foreclosure and surprised at a tax bill resulting from a failed investment.
Advanced planning may help to mitigate this potential mismatch. We strongly urge you to consult with a tax attorney or CPA in the event that you are faced with a short sale or foreclosure.
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
"The beneficial ownership registry successfully launched on January 1 this year," Andrea Gacki, director of the Financial Crimes Enforcement Network, said during a February 14 oversight hearing of the committee. "In the first week alone, more than 100,000 companies successfully filed their beneficial ownership information. And I am pleased to report that today, so far, FinCEN has received more than half a million reports successfully filed."
Brian Nelson, Treasury undersecretary for Terrorism and Financial Intelligence, told the committee that there are 32 million companies that are expected to file a BOI report.
Gacki continued: "The now ongoing better collection of beneficial ownership information, paired with the forthcoming phased provision of access to the database by law enforcement and other authorized users will close what is long been identified as a gap in the United States anti-money laundering and countering the financing of terrorism regime."
Gacki and Nelson were put on the defensive during the hearing as committee members challenged them on the effect of the reporting requirements on small businesses.
She noted that FinCEN took steps to make sure the filing system is "workable for small businesses," including making it simple with the ability to complete in 20 minutes without the need to seek professional help that could end up costing a small business more money.
Nelson also emphasized that Treasury is using all available tools to spread the word of the filing requirements and offer guides on how to file.
"We recognize that a number of these small businesses have never heard of FinCEN, so there’s a big educational campaign," he said, adding that the agency is working on a solution for those unable to file BOI electronically, such as businesses in Amish communities.
Gacki also stressed that if there are issues related to filing, FinCEN is not looking to take action against those who are simply having trouble filing their BOI report.
"I want to stress that, when it comes to enforcement, the statute is clear," she said. "We can only take enforcement action for willful violations. We are not out to take ‘gotcha’ enforcement actions. We want to educate about the requirement."
AICPA Calls For Suspension Of BOI Reporting Requirement
Despite the efforts FinCEN and the broader Treasury department are making to educate the public on the BOI reporting requirements, the American Institute of CPAs is calling for the suspension of BOI reporting requirements.
In a February 13, 2024, letter to the leadership of the House Financial Services Committee and the Senate Banking Committee, AICPA stated the BOI reporting rule "should be suspended until the small business community is considered well-informed of their requirement to report BOI information to FinCEN and the outstanding questions by the financial professionals who serve this community have been answered."
AICPA stated that small businesses "should have a reasonable chance at compliance" in addition to a timeframe to gain awareness of the requirements. "To comply and provide the information necessary, small businesses need additional time to work through these and other questions that have not been answered in the six weeks this rule has been in effect. We urge you to suspend the rule and give small entities the time necessary to work through this requirement so we can best support the small business community."
By Gregory Twachtman, Washington News Editor
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny.
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny. The ERC Voluntary Disclosure Program allows businesses to rectify incorrect claims by repaying just 80% of the amount claimed. Taxpayers who realize their claims are ineligible are urged to quickly pursue the claim withdrawal process.
The IRS has highlighted seven suspicious signs indicating potential inaccuracies in ERC claims. These include:
- Too many quarters being claimed: Employers should ensure they meet eligibilitycriteria for each quarter claimed.
- Government orders that dont qualify: Employers should have clear documentation demonstrating how and when government orders related to COVID-19 impacted their operations.The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Also, employers should avoid a promoter that supplies a generic narrative about a government order.
- Too many employees and wrong calculations : Employers should accurately calculate the credit based on changes in the law and avoid overclaiming. For details about credit amounts, see the Employee Retention Credit - 2020 vs 2021 Comparison Chart.
- Business citing supply chain issues :Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
- Business claiming ERC for too much of a tax period: Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
- Business didn’t pay wages or didn’t exist during eligibility period: Employers can only claim ERC for tax periods when they paid wages to employees.
- Promoter says there’s nothing to lose: Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they have nothing to lose.
The Employee Retention Credit (ERC) is available to eligible employers who paid qualified wages to some or all employees between March 12, 2020, and January 1, 2022. Eligibility varies based on the time period:
- For 2020 and the first two quarters of 2021: Eligibility is based on trade or business operations being fully or partially suspended due to a COVID-19-related government order or experiencing a decline in gross receipts.
- For the third quarter of 2021: Eligibility includes suspension of trade or business operations, a decline in gross receipts, or being classified as a recovery startup business.
- For the fourth quarter of 2021: Only recovery startup businesses are eligible.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2024 limit annual depreciation deductions to:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2024 are:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.
The annual cap for this excess depreciation is:
- $7,160 for passenger cars and
- $7,160 for SUVS, trucks, and vans.
Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2024, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:
- $62,000 for a passenger car, or
- $64,000 for an SUV, truck or van.
The 2024 lease inclusion tables provide the lease inclusion amounts for each year of the lease.
The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.
Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts
The depreciation caps and lease inclusion amounts do not apply to:
- cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
- SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.
So taxpayers who want to avoid these limits should "think big."
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
Included in the first wave of redesigned notices are notices to taxpayers who served in combat that may be eligible for tax deferment, notices that remind a taxpayer that they may have an unfiled return, and notices that remind a taxpayer about their balance due and where they can go for assistance.
"The IRS has a large number of these letters as well as other standard correspondence,"IRS Commissioner Daniel Werfel said during a January 23, 2024, teleconference with reporters."And as we’ve heard from tax professionals as well as taxpayers, these notices can be confusing. They cover complex topics. They can include a lot of legal language, and with our current systems and machines, the letters can be a mishmash of looks that do not always have a consistent familiar look you might get from a credit card company or a bank."
Werfel said that these issues made it clear the agency management that they need to redesign the notices to utilize clearer, plain language that a taxpayer can act upon without potentially needing to consult with a tax professional to help understand the information being sent and potentially requested. About 20 million of these 31 notices were sent to taxpayers in calendar year 2022, he said.
He highlighted the potential that the redesigned notices will have by discussing the pilot program that redesigned Notice 5071C, which asks questions about possible identity theft. The IRS made the language clearer and included a QR code to direct taxpayers to the appropriate web page to allow them to respond to the notice.
"In all, 60,000 taxpayers received this pilot letter compared to taxpayers who received the original letter,"Werfel said."There was a 16 percent reduction in taxpayers who called the IRS as their first action and a 6 percent increase in taxpayers who used the online option. The IRS will apply the lessons learned from this pilot to a larger redesign initiative."
By the 2025 tax filing season, Werfel said the IRS is hoping to have redesigned up to 200 notices, which make up about 90 percent of the notices sent out to individual taxpayers in 2022.
By Gregory Twachtman, Washington News Editor
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims.
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims. Both programs aimed to help employers to avoid penalties and interest on incorrect claims. CI special agents plan to conduct nationwide educational sessions in February for tax professionals, focusing on the ERC. These sessions, part of a broader initiative, will be held in at least 23 U.S. states and the District of Columbia. The IRS has implemented several initiatives to address inappropriate claims by businesses. Some key points are listed below.
ERC Voluntary Disclosure Program (Open until March 22, 2024):
- businesses with erroneous claims and received payments can participate;and
- the program runs until March 22, 2024.
Withdrawal Program for Pending ERC Claims:
- the IRS continues to accept and process requests to withdraw an employer's full ERC claim under a special withdrawal process.
ERC Eligibility Information:
- special information is available to help businesses understand Employee Retention Tax Credit guidelines; and
- resources include ERC FAQs and the ERC Eligibility Checklist, offered as an interactive toolor a printable guide.
Increased IRS Compliance Activity:
- letters notifying taxpayers of disallowed ERC claims have been sent;
- letters related to claiming an erroneous or excessive credit are planned; and
- ongoing compliance efforts include Audits, Civil Investigations, and Criminal Investigations.
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN.
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN. Under the Access Rule, issued in December 2023, BOI reported to FinCEN is confidential, must be protected and may be disclosed only to certain authorized federal agencies; state, local, tribal and foreign governments; and financial institutions. The guide includes sections summarizing the Access Rule’s requirements that pertain to small financial institutions’ access to BOI.
Further, FinCEN intends to provide access to certain categories of financial institutions with obligations under the current Customer Due Diligence (CDD) Rule. Therefore, this Guide includes sections summarizing the Access Rule’s requirements that pertain to these small financial institutions only
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
"This analysis provides a more comprehensive assessment of the revenue effects of the transformational enforcement and modernization efforts enabled by the IRA" Greg Leiserson, Treasury deputy assistant secretary for tax analysis, said February 6, 2024, during a press teleconference."The IRS estimates that the IRA, as enacted, would increase revenue by as much as $561billion through fiscal year 2034, substantially more than earlier estimates. If IRA funding is renewed with it runs out, as the administration has proposed, estimated revenue would be as much as $851 billion."
A previous estimate had the IRA generating an additional $390 billion over the next 10 years based primarily on enforcement hires as the key revenue driver and assuming a diminished return over time.
Leiserson noted that previous estimates"were limited to revenues generated by direct enforcement activities resulting from higher enforcement staffing. This narrow focus does not consider the significant impact of the technology, data, and service improvements made possible by the IRA or any deterrent effect the greater enforcement capabilities and activities would have in order to better assess the revenue raised by this transformation."
The new analysis is broken down into five categories:
- Direct Revenue: payments received related to enforcement actions
- Revenue Protected: stopping illegitimate refund claims before the refund is issued
- Impact of Service on Compliance: making it easier for taxpayers to pay what they owe
- Compliance Assurance: increasing transparency and tax certainty for complex tax situations
- Efficiency Gains: including from IT investments and improvements to data analytics
The IRS has traditionally made estimates in the first two categories listed.
IRS Chief Data and Analytics Officer Melanie Krause during the call highlighted that in addition to the heightened compliance and enforcement efforts going on against the wealthy individuals that may not be paying taxes they legitimately owe, the improvements to things such as customer service and to improving access to Taxpayer Assistance Centers also helps.
"For example, whether we have the resources to serve taxpayers by being available to answer the phone" when they have question is important for voluntary compliance, she said, adding that the same is true for when people use TACs.
She noted that the analysis being published"is a pioneering step forward for developing a more exhaustive and accurate estimates of the return on investment for IRS funding, which will enrich our understanding of how these investments yield tangible outcomes,"she said.
Taking into consideration everything and not just enforcement gains "illustrate the bottom-line importance of investing in our nation’s tax system really can’t be overstated," Krause said."And the resulting changes will ripple out and create benefits for taxpayers and the nation in many ways."
By Gregory Twachtman, Washington News Editor
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
In a January 17, 2024, letter to the agencies, AICPA recommend that guidance be issued across areas.
First, the organization recommended that Treasury and the IRS "ssue guidance stated that federal income tax withholding with respect to a participant’s mandatory Roth IRAcatch-up contribution is not required before February 1 of the year in which the amount is contributed," the letter stated.
Second, AICPA called for guidance "allowing an elective deferral which is treated as a Roth catch-up contribution due to being recharacterized based on the failure of the ADP [actual deferral percentage] test, to be taxable to the participant in the year of recharacterization."
Third, it was recommended that future guidance issued in relation to Section V.3 of the Notice 2023-62"clarifies that for purposes of determining if an employee’s participating wages exceeds $145,000 (as adjusted0, only wages from the employee’s specific common law employer in the previous year are included, and only if it is a participating employer in the plan."
Finally, AICPA recommends the agencies "issueguidance stating that an individual who had deferrals characterized as Roth contributions as a result of not contributing deferrals equal to the regular limit be permitted to have them designated as regular deferrals."
The organization characterized these guidance recommendations as helping to bring more simplicity to the tax system.
"Due to the mandate in SECURE 2.0 requiring certain catch-up contributions be made on a Roth IRA basis, the IRS issued notice 2023-62 to help implement the provision," Kristin Esposito, AICPA director of tax policy and advocacy, said in a statement. "AICPA want to highlight certain administrability issues noticed in the guidance that we believe will make for a smoother transition."
By Gregory Twachtman, Washington News Editor
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use.
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use. The audits will be focused on large corporations, large partnerships and other high income taxpayers, and will scrutinize whether the use of jets is being properly allocated between business and personal reasons. "During tax season, millions of people are doing the right thing by filing and paying their taxes, and they should have confidence that everyone is also following the law," said IRS Commissioner Danny Werfel, "These aircraftaudits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities."
These audits of corporate jet usage is part of the IRS Large Business and International division’s "campaign" program and includes issue-focused examinations, taxpayer outreach and education, tax form changes and focusing on particular issues that present a high risk of noncompliance. "The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act," Werfel said. In addition to the work on corporate jets,the IRS has a variety of efforts underway to improve tax compliance in complex, overlooked high-dollar areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.
Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?
Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?
A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.
In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.
First-in, first-out (FIFO)
In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).
The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.
Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.
Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.
Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.
Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.
Specific identification
When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.
Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.
Mutual funds
If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.
Securities received in reorganization
An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.
As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.