LIFO & tracking cost basis

[dmtisesp]

I have RSUs & ESPP through my employer but I know I'm overconcentrated (too many eggs in one basket). I have shares accumulated at different prices over a period of time, some with unrealised gains & unrealised losses.

I'm new to investing but after some research I 'think' I understand the general principles of cost basis calculation & the Irish rules of FIFO, LIFO & Wash Sale (including bed & breakfast strategy) & tax loss harvesting. Am I missing any other Irish rules I should be aware of?

What I don't understand however is;

1. How to identify & implement the optimal divestment strategy that reduces my holdings/exposure whilst maximising profits & minimising losses?
2. Are there any general rules of thumb to follow? E.g.

• Sell shares with the highest after-tax value first (i.e. ones with highest gain & highest effective cost basis), working your way to down to ones with lowest after-tax value (i.e. ones with lowest gain & lowest effective cost basis). Does this sound right?
• Use tax loss harvesting to minimise tax, use yearly CGT exemption (including Bed & Breakfast strategy), avoid Wash Sales where possible.
• Anything else?

1. Do I really need to pay a financial advisor to do this for me to identify the optimal shares to sell at any given point in time or is there somewhere I can learn this myself?
2. How to apply the FIFO rule while tracking cost basis correctly to stay on the right side of Revenue.

With FIFO for example, if I have multiple lots bought with different share quantities, at different dates & at different prices (some with unrealised gains & losses), e.g. lots A to F inclusive, such as;

• Lot A: 15 shares purchased at €10.
• Lot B: 6 shares at €16
• Lot C: 6 shares at €18
• Lot D: 6 shares at €20
• Lot E: 23 shares at €22
• Lot F: 30 shares at €12

If the current share price is say €15, under the FIFO rule if I sell all of lot F (30 shares), for CGT calculation purposes I understand I need to use the cost basis for all of Lots A, B, C & D (excluding 3 of the shares in Lot D), correct?

If yes, when I later go to sell specific lots A, B, C or D, which lots should I use as the cost basis for CGT calculation purposes ? I believe under FIFO I should take the cost basis of the last 3 shares of Lot D & then Lot E, correct?

If yes & if I also happen to have additional lots G to K at the time & sell some of these later, under FIFO do I ever use the cost basis of the originally sold Lot F for CGT calculation purposes (even though the shares themselves have already been sold)? I guess I'm asking do I need to track (in a spreadsheet) the lots I've bought, including the date, purchase price & whether or not they've been used for cost basis calculation purposes for the purpose of CGT calculation on the sale of other shares? I believe the answer is yes but I'd just like to confirm. If so, does anyone have a recommended spreadsheet template?

Finally, if anyone has any good resources (articles, videos, courses, books) explaining the correct (& optimal) process for the sale of shares across multiple lots, prices & times from an Irish context that can you share here for educational purposes please? Useful resources I found so far include;

• Malone Financial on YouTube
• https://irishfinancial.ie/
• https://www.revenue.ie/en/gains-gif...-an-asset/selling-or-disposing-of-shares.aspx

Side-note: It seems the US rules are similar but more extensive & complex than Ireland's but also give more flexibility, I could be wrong.

Thanks

 

[gardenlady]

@dmtisesp

Lot A: 15 shares purchased at €10.

Lot B: 6 shares at €16

Lot C: 6 shares at €18

Lot D: 6 shares at €20

Lot E: 23 shares at €22

Lot F: 30 shares at €12

You're way overcomplicating the FIFO stuff. It's exactly as it sounds - First In First Out. You don't get to pick which lots to use. So to your example above (assuming A is the first lot you bought) - if this was your holding and you sold 20 shares then you must start at the top (first in) of your holdings and work your way down. So you would have to use up all of Lot A and 5 of Lot B. Therefore your cost basis is (15*€10+5*€16)/20=€11.50

Some time later you then sell 13 more shares. Again using FIFO you must start with your oldest holding (the 1 remaining share from Lot B) and work your way down. So this time your cost basis goes through Lot B, C & D giving you (1*16+6*18+6*20)/13=€18.7

I have RSUs & ESPP through my employer but I know I'm overconcentrated . [...] What I don't understand however is how to identify & implement the optimal divestment strategy that reduces my holdings/exposure whilst maximising profits & minimising losses

What is your goal here? If it is to reduce exposure to your employers performance then forget about FIFO and B&Bing and all of that. Just sell the lot of them and put the proceeds into your investment of choice (where the flowchart is a good place to start to identify what that investment should be).

 

[dmtisesp]

@gardenlady Thanks for the reply.

You don't get to pick which lots to use.

I get that I don't get to pick which lots to use for CGT calculation purposes under FIFO but are you saying that I also cannot pick which lots to sell? For example, in my brokerage account when I go to sell it asks for which lots to sell & it lets me pick a specific lot & the number of shares within that lot (all or a select number). Are you saying I can't actually use that function & must select & sell the shares I first purchased (in the order in which they were purchased)? If so, that seems heavily restrictive as it;

1. 'enforces' losses or gains to be realised. E.g. it means you might have to realise a significant loss from the earliest purchased shares before you get the opportunity to realise any gain from the sale of later purchased shares
2. Means you might have to hold shares for longer than you want as you have to 'time the market' per se (never recommended) before the share price is at a point where it makes sense to realise profits (or losses, for tax loss harvesting purposes).
3. I'm sure there's many other costly implications I'm not considering.

Is there somewhere on Revenue or elswhere that confirms that you can't sell specific lots, even if you calculate CGT on those sold shares on a first in first out basis ?

From Revenue's website [1] re shares bought on different dates

When you dispose of some of the shares, the oldest shares are treated as being sold first. This is know was the First-in First-out (FIFO) rule.

It doesn't actually state that you actually have to sell the oldest shares though, just that they are 'treated as being sold first'. This is the point I need confirmation on.

What is your goal here?

My goal is divestment from an overconcentrated holding in my employer's stock relative to my overall net worth (the stock is well over the 10% of net worth generally recommended limit). I want to achieve that goal by identifying & implementing the optimal divestment strategy that reduces my holdings/exposure whilst maximising profits & minimising losses. I don't want to sell all my shares, just some, at least to get below the $60K US estate tax limit & hold the rest of the shares (long).

If it is to reduce exposure to your employers performance then forget about FIFO and B&Bing and all of that.

As FIFO is the rule that needs to be followed then I can't ignore it. B&Bing I could ignore but I may well choose to use B&Bing some years in order to make use of my annual CGT allowance & raise the cost basis of shares by doing so.

Just sell the lot of them and put the proceeds into your investment of choice

Thanks but that's a hammer approach that will cost me money, rather than a structured approach that will do the opposite. I'm not looking to sell all of them. Doing so would leave me with a much higher CGT bill for this year than is worth it. I'd rather sell some this year, some next year etc, utilising my CGT allowance & tax loss harvesting to minimise my CGT bill (= more money in my pocket).

[1]

https://www.revenue.ie/en/gains-gifts-and-inheritance/transfering-an-asset/selling-or-disposing-of-shares.aspx#:~:text=When%20you%20dispose%20of%20some,the%20shares%20you%20bought%20first

 

[gardenlady]

@dmtisesp

I get that I don't get to pick which lots to use for CGT calculation purposes under FIFO but are you saying that I also cannot pick which lots to sell?

This is semantics and doesn't actually make a material difference. The lots only matter for CGT purposes. So yes your broker allows you to sell different lots outside of FIFO, but this only affects the reports that your broker generates and does not affect your tax position. Your broker likely provides this function because it operates globally, so it lets people create whichever form of reports are relevant to their own country. You still must follow FIFO for tax reporting and pretend you sold the "first in" lots, as per the Revenue link you shared "When you dispose of some of the shares, the oldest shares are treated as being sold first."

The option to sell different lots is provided by your broker (who likely operate globally) to give you the flexibility to make their reports under your tax treatment (eg. in some scenarios CGT is applied on a LIFO basis, so your broker gives you the flexibility to chose this for particular sales).

Revenue are quite responsive to queries, so by all means reach out to them.

that seems heavily restrictive

Tax rules are restrictive. Them's the breaks. Wait until you learn how Irish tax treats ETFs!

Thanks but that's a hammer approach that will cost me money, rather than a structured approach that will do the opposite

Seeing as you are concerned about the $60k estate tax threshold, I'm assuming we are talking about a relatively large holding. In that case, the CGT exemption at €1270 (so €400 tax saving) is chump change. A swing of ~1% in the share price (ie. normal daily volatility) would easily wipe out this saving. Therefore, holding on to five/six figures worth of stock that you want to sell just so that you can save €400 in tax is a questionable strategy. And there's no benefit to "tax loss harvesting" and carrying forward losses into a future year compared to just using those stocks that are down against your gain this year.