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Final tax plan leaves popular stock sale strategies untouched

  • A first-in-first-out proposal, which would require investors to sell their oldest stocks first, has been eliminated from the final GOP tax bill.
  • The elimination of the rule should be good news for investors.
Pedestrians are reflected on an electronic stock indicator at the window of a securities company in Tokyo on Aug. 30, 2017.
Toshifumi Kitamura | AFP | Getty Images
Pedestrians are reflected on an electronic stock indicator at the window of a securities company in Tokyo on Aug. 30, 2017.

The proposed first-in-first-out rule on stock sales has been struck in its entirety from the tax overhaul bill, which should give individual investors reason to cheer.

The controversial tax reform proposal had been revised to allow mutual funds to continue the practice. Now, the FIFO rule as it's known, has been taken out of the legislation altogether, CNBC senior contributor Larry Kudlow first reported.

The first-in-first-out, or FIFO, method, would have required individual investors to sell the first shares they bought. That would eliminate the flexibility to choose which lot to sell when investors have acquired multiple blocks of shares over time.

The net result often would be that investors would take a bigger tax hit on those stock sales because the oldest shares tend to have the biggest gains.

The news that the rule is not included in the tax bill is encouraging for investors, said Joe Ziemer, vice president of policy at Betterment, a provider of automated investing services.

"It would only add a lot of complexity," Ziemer said.

If the rule were first-in-first-out per account, it could have led investors to create multiple accounts with multiple brokerages, Ziemer said. As a result, it would become increasingly complex to figure out which lot to sell, he said.

FIFO would also impact investors who have just retired.

"They would have to immediately sell their oldest lots, which would trigger a larger tax bill," Ziemer said.

Betterment would have been affected by the rule, as its current algorithm helps investors identify the most optimal stocks to sell. But because such selection strategies are broadly used, the rule would have affected all investors and not just Betterment's clients, Ziemer said.

"It's not just a robo-advisor issue," Ziemer said. "We brought it to the masses in a more significant way."