J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.2 Earmarking Stock Lots

Keep a record of all your stock transactions, especially when you buy the stock of one company at varying prices. By keeping a record of each stock lot, you may control the amount of gain or loss on a sale of a part of your holdings. If you do not make an adequate identification, the IRS will treat the shares you bought first as the shares being sold under a first-in, first-out (FIFO) rule.

You may not average the cost of stock lots; averaging is generally allowed only for mutual-fund shares (32.10). However, under the new basis reporting rules (5.8) for “covered” securities acquired after 2011, averaging is allowed for most ETFs structured as regulated investment companies, and for shares acquired through a qualifying dividend reinvestment plan (DRIP).

If your stock is held by your broker, the IRS considers that an adequate identification is made if you give instructions to your broker about which particular shares are to be sold, and you receive a written confirmation of your instructions from the broker or transfer agent within a reasonable time.

EXAMPLE

Over a three-year period, you bought the following shares of Acme Steel stock: In 1998, 100 shares at $77 per share; in 1999, 200 shares at $84 per share; and in 2000, 100 shares at $105 per share. When the stock is selling at $90, you plan to sell 100 shares. You may use the cost of your 2000 lot and get a $1,500 loss if, for example, you want to offset some gains or other income you have already ...