Tax Prophet: FAQ April 28, 1996


Frequently Asked Tax Questions -- April 28, 1996



Sale of Stock


Questions

  1. Question: I purchased 20 shares of stock at $50 per share ("first block" of stock). I subsequently purchased 20 more shares but at $100 per share ("second block"). I sold 20 shares each at $110.. What is my taxable gain? [Answer]
  2. Question: What if the shares sold in the previous question were from a mutual fund? [Answer]
  3. Question: I bought 20 shares of Intel at $56 per share. The stock split 2:1. I sold 20 shares at $66 per share. What is my tax liability? [Answer]


  1. Answer to Question #1:

    Gain is the difference between the purchase and sales prices. You need to identify which block you sold. For example, if you can identify the stock sold as the second block, your basis is $100 per share, so your taxable gain is $10 per share.

    The stock sold will be represented by the certificates delivered. To adequately identify the stock before it is sold, specify the particular lot by identifying its purchase date, purchase price, or both. If selling through a broker, you must specify the specific stock to be sold, and obtain written confirmation from your broker within a reasonable time. If you sell stock directly, maintain a written record of the specific stock you intended to sell. The same rules apply if you sell only part of all shares represented by a single certificate.

    If you cannot identify the lot from which the stock was sold, the first-in, first-out rule ("FIFO")apples, which handles the first share bought as the first sold. In your case, the first stock you purchased at $50 per share is the stock sold, thus your gain is $60 per share.

    Note: Currently, you cannot use an average value in calculating your stock basis. However, President Clinton's tax proposals in the fiscal 1997 budget include requiring an average cost basis for securities.

    [Return]

  2. Answer to Question #2:

    Generally, mutual fund investments have the same rules as stock and bond investments. However, mutual fund investors may use certain averaging methods to determine basis, if the shares were acquired at varying times and prices, and were in an account held by an agent.

    The average basis is determined one of two ways. Under the double-category method, all shares at the time of sale are divided into a short-term capital gains category and long-term capital gain category. You then average the stock basis in each category. Under the single category method, the basis in all shares is averaged.

    Recheck your basis of the shares sold during the year, especially shares in a mutual fund. You must report any reduction in gain or increase in loss from income and capital gains dividends that were automatically reinvested over the year. This will usually increase you basis (and therefore decrease your gain).

    [Return]

  3. Answer to Question #3:

    When the stock splits, your existing basis in re-allocated among the total number of shares. While your original basis was $56 per share, after the split your new basis became $28 per share. Thus, your taxable gain on the $66 per share sale of 20 shares with a new $28 basis was $38 per share.

    You received no taxable gain when the stock split because stock splits never result in a realization of income by shareholders. A stock split divides up the original shares into more share units and thus reduces the per-share value of each outstanding share. A stock split-up never results in a realization of income by the shareholders.

    [Return]





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