Posted in Finance, Accounting and Economics Terms, Total Reads: 343
Definition: Specific Identification Method
Specific identification method is a methodology of cost basis accounting method which gives the lowest possible tax charges. The shareholder chooses the shares and gives instructions to the broker on the shares which needs to be redeemed by the shareholder.
Whenever an investor wants to sell a part of his holding that is making a loss, Specific identification method is most useful in such cases. The advantage of this method is that one can show that he has incurred losses in the part of the holding that is being sold and obtain minimum taxes. This is a complex method and requires more detailed approach than the commonly used FIFO (First in First Out) method. The main disadvantage is the huge amount of record keeping that is required to be done.
Example: Suppose an investor has invested in 10 shares of a company during year 1, 20 during year 2 and 15 during year 3. Using the FIFO method he will have to redeem the 10 shares in year 1 first and others by following a timeline but in specific identification he can redeem any of the total 45 shares in any order. This method provides a flexibility in redeeming the shares.