Mutual Funds:

Figuring Out Your Client's Capital Gains on Stock Sales

Come tax season, investors from around the country need to take out their records of shares and the prices they bought them at to figure out the tax they would pay on them. It’s simple if all your client’s stocks were bought at the same time and same price, but if they had a diverse portfolio, theu need to be very careful. For the shares your client sells, they need to have an idea on how to report them on their tax return. The following are methods that they can use (the IRS already does!) to figure out their capital gains:

  • Investors who act smartly and control the sale of their stocks through a broker or mutual fund can take advantage of the specific identification method. Under this method your client pays the lowest possible capital gain tax because they can advise the broker to get rid of the ones that will yield them the greatest gain over time. It’s also smart to take into account how long they have had share, because after 18 months, they usually pay the lowest capital gains tax possible.
  • For those investors that didn’t take the above route and now don’t have any idea on which sales to report to the IRS, they can take advantage of the averaging method. The gains are based on the average cost of all the shares in the fund. This produces a slightly higher gain tax.
  • The one method the IRS loves to use when your client doesn’t take advantage of either of the first two methods either due to bad record-keeping or because they did not know about them, is the first in, first out method. Under this method IRS chooses which shares were sold at the lowest possible prices hence yielding the highest possible gain.