A controversial proposal in the Senate tax bill could put individual investors on the hook for a bigger tax bill when selling investments.
The proposed change, which originally would have hit both individual investors and mutual funds, sparked a backlash from the fund industry.
As a result, the Senate Finance Committee has eliminated mutual funds from the proposal. The change would still impact individual investors.
Today, when an investor goes to sell a stock they own in a taxable brokerage account, they can pick which tax lot they want to sell if they have acquired multiple blocks of shares over time.
But the Senate version of the tax bill would put an end to that choice and instead require an investor to sell the first shares they bought. The concept is known as the first-in-first-out method (FIFO) and could have big implications for taxpayers, according to Tim Steffen, director of advanced planning at Baird.
"Because your oldest shares tend to have the biggest gain, that's going to cause more investors to realize larger gains than they would have otherwise wanted to realize," Steffen said.
If approved, the rule would require investors to pay an additional $2.7 billion in taxes over 10 years, according to estimates from 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," Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said in an interview.
Andy Rachleff, CEO of automated investment firm Wealthfront, said the rule would have negative consequences for investors.
"We're disappointed to see the FIFO proposal included in the Senate tax bill," Rachleff said. "If passed, it would most certainly be a loss for the individual investor."
More from Personal Finance: