A threat to investors’ tax management flexibility hangs over the ongoing tax-legislation negotiations, writes Financial Advisor.
Tucked into the Senate version of the tax bill is first-in-first-out language that forces investors with taxable brokerage accounts to sell their oldest lots of a stock first. If that lot has seen a big capital gain, investors would face a harsher tax consequence.
The Senate wants this because it desperately needs to raise revenue to defray the 10-year, $1.4-trillion cost of its planned tax cut. The FIFO requirement would raise an estimated $2.4 billion over 10 years according to the Joint Committee on Taxation.
“Brokers are going crazy with this change, urging their clients to sell, sell, sell,” New York-based tax and accounting advisor Robert Willens tells Financial Advisor. “The current rules allow investors the flexibility to choose which shares they want to sell, which they need to do for tax-loss selling.”
The Senate proposal exempts regulated investment companies like mutual funds and ETFs. Right now the Senate and House are working to consolidate their tax bills.
Ideas are already being floated in the accounting community about how to cushion the FIFO blow. One possibility is splitting a position between different brokers so that high- and low-cost lots are housed separately.
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