How to Identify Stock Lots to Sell
The primary reason to identify individual stock lots for sale is to minimize taxes. If you have already taken capital gains during the year, you could choose tax lots that are trading at a loss to help offset those gains. If you wish to sell only a portion of a winning stock, you might consider selling tax lots with the smallest gain to minimize your capital gains tax. Conversely, if you have already booked losses for the year, you might take advantage of this opportunity by selling tax lots with larger gains, which would remain untaxed to the extent of your losses.
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Instructions
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Calculate your gains and losses. Before you can begin any tax strategy with your stock lots, you must assess your current tax situation. Usually your brokerage firm will keep records on whether you have a net gain or loss from your trading throughout the year; use this figure as your starting point. Once you know the size of your gain or loss, you can begin developing a plan.
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Analyze your investments. In identifying stock lots to sell, you should make an investment decision in addition to your tax decision. In other words, while you can sell tax lots simply to match your current gains or losses, wherever possible you should sell stock lots that you would want to sell anyway, for investment purposes. One of the reasons for this is to avoid a "wash sale." A wash sale occurs when a security is sold at a loss and a "substantially similar" security--or the same exact security--is purchased within 30 days of the sale. Tax losses are disallowed for wash sales, which means if you sell a stock just to capture the loss, but you still want to own that security, you cannot buy it back for 30 days--or else you will invalidate the tax loss, which is why you sold the security in the first place.
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Check your purchase information. Once you have identified securities you may wish to sell, for both investment and tax purposes, check to see if you have purchased the security at more than one time. If you have made multiple purchases, the individual gains or losses will differ, lot by lot, and you might find you have to do less selling than you think. For example, say you have a current loss of $10,000, and a security with two purchase dates and a total taxable gain of $10,000. Rather than selling the entire position, you may discover that one of your purchases is at break-even, while the other one holds the entire $10,000 gain. In this case, if you still want to own the security, you can simply sell the one lot with the gain and keep the other one.
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Sell the appropriate lots. Once you have analyzed your tax situation, made investment decisions about your securities and broken down your purchases trade by trade, you have identified the stock lots to sell and can enter your trades.
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