Here is my homework problem that I need some help with:
"A taxpayer is considering selling 100 shares of stock. The current market price is $7,500. Which shares should the taxpayer instruct the broker to sell, and what are the tax consequences of this selection if the taxpayer owned the following shares in the company?"
Certificate # Date Acquired # of Shares Cost
CR642 4-11-77 300 $15,000
DO1111 9-10-82 100 $9,000
EA002 8-13-84 100 $6,000
I would sell the shares purchased in 1982, which will involve a (long term) capital loss of $1500. There may have to be offsetting capital gains elsewhere in the portfolio (or no other capital losses), to obtain an immediate tax benefit.
I could be wrong.
See
http://www.irs.gov/newsroom/article/0,,id=106799,00.html
To determine which shares the taxpayer should instruct the broker to sell, we need to consider the concept of "cost basis" and the tax consequences associated with it.
The cost basis refers to the original purchase price of an asset, including any associated costs such as commissions or fees. When selling an asset, capital gains or losses are calculated based on the difference between the selling price and the cost basis.
In this case, the taxpayer owned three different certificates of stock with different acquisition dates and costs. To determine which shares to sell, there are a few methods that can be used: FIFO (First In, First Out), LIFO (Last In, First Out), or Specific Identification.
1. FIFO Method: This method assumes that the first shares purchased are the first ones sold. According to the information provided, the taxpayer would instruct the broker to sell the shares acquired through Certificate CR642 on 4-11-77, as they were the first acquired.
2. LIFO Method: This method assumes that the last shares purchased are the first ones sold. According to the information provided, the taxpayer would instruct the broker to sell the shares acquired through Certificate EA002 on 8-13-84, as they were the most recently acquired.
3. Specific Identification Method: This method allows the taxpayer to specify which shares they want to sell. If the taxpayer can identify the specific shares they want to sell (e.g., by certificate number or purchase date), they can instruct the broker accordingly.
The tax consequences of selling the shares will depend on the method used to determine which shares to sell and the applicable tax laws in the taxpayer's jurisdiction. However, regardless of the method chosen, it is important to note that selling shares may result in capital gains or losses, which can have tax implications. It is recommended for the taxpayer to consult a tax professional or reference the tax laws applicable to their situation for a more accurate assessment of the tax consequences.