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Specify the Shares
You Want to Sell |
Assume that, a few months ago, you bought 2,000 shares of stock in a Company A for $10 a share. The company has just announced a two-for-one split. That means you now own 4,000 shares with a basis of $5 a share.
As you can see, the split itself doesn't increase the value of your investment. But it could make a big difference in your tax bill when you trade the shares later on.
A few months after the split, the stock price starts to rise. You buy another 500 shares at $8 a share. Shortly thereafter, you sell 500 shares at $9 a share.
So what is your taxable gain? Is it $1 per share? It depends. Unless you specify otherwise, the IRS will assume that the shares you've sold are the original shares you purchased. In that case, your taxable gain is $2,000, or $4 per share ($9 sale price less $5 basis after the split). If you prefer to let the original shares grow in value, tell the IRS that you are selling the shares you purchased most recently. You'll have to record the stock certificate numbers in chronological order and give written instructions to your broker.
No matter which shares you sell, be sure you've held them for more than a year. That way, your profit will be taxed at the reduced capital gains rate of 15 percent or less.
Note: Under current law, qualified taxpayers in the 10 percent and 15 percent tax brackets pay zero percent long-term capital gains tax in 2008 to 2010. However, certain full-time students under age 24 do not qualify for the zero percent rate under revised "Kiddie Tax" rules. (In 2007, taxpayers in the 10 and 15 percent tax brackets paid 5 percent long term capital gains tax on investments held for more than a year.) Taxpayers in higher tax brackets pay 15 percent on long-term capital gains for 2007 and 2008.
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Lazar Levine & Felix LLP provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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