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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. Taxpayers in higher tax brackets paid 15 percent on long-term capital gains for 2008.
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