Investment Basics: The Gain-Loss Game
December 4, 2017
By Colin OShea
When it comes time to sell securities in a taxable account, knowing your cost basis in the investment will tell you whether you have a gain or loss on the sale. Generally, your basis is the difference between the price you paid for shares of stock or a mutual fund, adjusted for any reinvested dividends or capital gain distributions and transaction fees.
Cost basis can also be affected by stock dividends and splits, company mergers, and spinoffs. So determining cost basis isn’t always as straightforward as it seems. And if you’re selling only part of an investment you’ve acquired over time, things get even trickier. Choosing the right calculation method for minimizing taxable gains or maximizing potentially deductible losses should be a priority.
FIFO: First In, First Out
With the FIFO calculation method, the first shares of stock purchased will be considered the first shares sold. The FIFO calculation may result in a larger tax bill if the investment you’re selling has steadily increased in value. If you’ve held the shares you’re selling for longer than one year, any gains may be taxed at a favorable long-term tax rate — 0% for individuals in the lowest income-tax brackets, 15% for most others.
You can designate the shares you want to sell using the specific identification method. You may be able to minimize taxable gains or maximize potentially deductible losses by selling the most expensive shares first.
If you’re selling some mutual fund shares acquired at different times, you have another option for figuring gain or loss: average-basis method. The total cost of all shares owned is divided by the total number of shares owned.
Inherited and Gifted Securities
Though basis is usually derived from cost, inheritances are treated differently. Generally, the basis of inherited securities is reset at their date-of-death value.
With gifted securities, the person receiving the securities generally takes the basis of the person who gave them. However, if the securities’ fair market value on the date of the gift is less than their original cost, you must use that lower value to determine any loss on a subsequent sale.
Contact your Security National Bank Wealth Management financial professional for more investment tips.