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Senate bill boosts taxes on stock sales

  • Under the proposal, investors would have to sell their oldest shares first, which typically results in a larger capital gain.
  • The change would raise an estimated $2.7 billion over 10 years.

Heads up, investors: A provision in the Senate's tax plan would take away your ability to pick and choose which stock shares you unload when you go to sell.

If the move is included in final legislation, investors would pay an estimated $2.7 billion more in taxes over a decade, according to the Joint Committee on Taxation.

"It's a good move as far as tax reform goes because it simplifies taxes, but it will leave investors with fewer choices when they sell stock, and they'll pay more in taxes," said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

Under current law, investors with taxable brokerage accounts have a couple of choices when putting in a sell order for stock shares: They can tell their broker to sell the oldest shares first (the first-in-first-out or FIFO method) or direct the sale of shares that were purchased on a particular date (specific identification method).

For holdings in a taxable mutual fund, investors get a third choice that could be retained under the Senate bill: using the average costs of the shares.

Don't wait until 1099s start arriving to begin gathering your data for filing.
Tetra Images | Getty Images
Don't wait until 1099s start arriving to begin gathering your data for filing.

The provision would eliminate the specific identification method, meaning stock investors would now be required to sell their oldest shares first. This also would mean that mutual fund managers would also lose the ability to pick specifically which shares to sell. The change would take effect Jan. 1.

"Requiring taxpayers to treat securities as sold on a first-in, first-out basis would be disproportionately harmful to ordinary Americans who invest with funds," said Paul Schott Stevens, president and CEO of the Investment Company Institute.

"It would increase significantly the amount of taxable distributions made to investors every year and tie the hands of fund managers as they pursue investment strategies on behalf of savers."

To illustrate why selling the oldest shares first can be more costly: Say you paid $100 for each share of XYZ Company in 2010 and $200 for more shares in 2015. Under the Senate proposal, if you go to sell shares in 2018 for $300, you would have to sell the oldest shares first.

This would mean you pay taxes on the difference between 2012's $100 purchase price and 2018's sale price of $300, or $200 per share. The taxes in that scenario are higher than if you can choose to sell the $200 shares and pay taxes on the gain of $100 per share instead.

"In a rising stock market, which we've had, the gains are likely greater on the shares you've held longer than ones you more recently purchased," Rosenthal said. "It's a revenue-raiser for the U.S. government."

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