Hello,
Just passing by, read Ron's ?s as a new day trader. Regarding how multiple trades of the same security would be handled for IRS purposes, Bruno** replied:
<<you have the ability to pick lots when you sell.>>
This is true, but one must keep very good records if this method of reporting is elected, so use caution.
I did a lot of research on this exact topic a couple of years ago, as I, too, traded in and out of a particular stock numerous times per day/week. I read books, did net research, spoke directly with the IRS' Technical Department in Atlanta several times, and channelled Mofu for clarification. End result was that FIFO (First In, First Out) is always assumed by the IRS, UNLESS the taxpayer declares that s/he is using the Identification of Shares method. (I'm assuming that you're referring to "picking lots" as being the taxpayer selecting which sell to match up with which buy for capital gain/loss calculations - this is called the "Identification of Shares Method" by the IRS.)
When using the ID of Shares method, the taxpayer must be able to show the IRS that SPECIFIC shares were bought and sold. I was told it was not sufficient just to put a buy and sell confirmation together. (I do not know if there is a way to note this with the online brokers yourself as I use FIFO, but you might ask.) This positive identification can be done by referencing the transaction # of the the shares that were bought on the confirmation form when those shares are sold. It is a pain to have to keep track of these numbers, but unless actual stock certificates are transferred to prove that specific shares are being sold, this is the only true way to prove the ID of specific shares. (Stock certificate transfers don't exist with day traders, obviously, since everything's kept in street name and no security is ever held for long anyway.) Therefore, you would have to enter somewhere on your online order or tell your broker, "I am selling 500 of the 1000 shares of NSCP which I bought on 11/5/98 with confirmation #123456. Please note this on this sale confirmation."
All of this is very clearly stated in IRS publication 550, Investment Income & Expenses. I know many traders who use the ID method, but fail to document what they are doing and assume that simply matching confirmation forms or saying that they sold a particular lot at a particular time is sufficient. It's impossible to say that particular shares were sold unless they are identified on the sell with their confirmation # from the buy as I mentioned above. I know many feel that it is unnecessary bookkeeping (yes, it sucks) and they feel that in an audit they would be fine. They might be. They might not. It depends on how badly the agent wants to pursue the issue, or perhaps how badly he's lost in the market compared to your stellar capital gains history. <gg> I imagine that the worst case would be the IRS recalculating all trades with the FIFO method if adequate ID has not been used and then slapping you with a fine, some interest perhaps, and taking your firstborn son. I'm not sure how 'ignorance' works as a defense with the tax boys, but when in the company of Romans, do as the Romans do... ;)
Note, too, that unlike reporting mutual funds, only the FIFO and ID of shares methods can be used with individual equity and options transactions unlike with mutual fund calculations in which FIFO, LIFO, ID of shares, or cost averaging can be elected. Also, with equity and options trades, the taxpayer cannot jump between the two methods (FIFO or ID) in any one tax year. You choose one method, and consistently use it for all transactions. Finally, if one chooses to switch to the FIFO method after having elected the ID of shares method, IRS approval in writing must be obtained.
As an aside, with the assumption that one would want to minimize capital gains <ggg>, I calculated my gains/losses using both the FIFO and ID methods and found little difference, in my case. It will depend on your specific trading situation. You may want to try this using a small lot of trades on NSCP for example, and see which would be more beneficial for you. The trick is in making sure that you match the # of shares properly.
Get the IRS publication 550, "Investment Income & Expenses" and read Chapter 4 on "Sales & Trades of Investment Property" under the heading "Stocks & Bonds". From this publication, with regard to my discussion above, I'll offer the following tidbits taken directly from this publication. (Excellent reading, btw. No one writes like the IRS... ;)
[How to elect FIFO or ID of Shares methods]
If you can definitely identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. However, if you buy and sell securities at various times in varying quantities and you cannot definitely identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares.
[How to adequately identify shares if you elect to use the ID method]
You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. If you have left the stock certificates with your broker or other agent, an adequate identification is made if you:
1) Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and
2) Received a written confirmation of this from your broker or other agent within a reasonable time.
Hope the info above was helpful, best wishes in your new career. Please do your own research, and then CALL THE IRS AND WAIT ON HOLD FOR 30 MINUTES YOURSELF, DAMMIT! [joking] Most importantly, don't forget that...
I Know Nada
**Hey Bruno, any relation to the Italian eatery with the same name? YUM! ;) |
