Posted in Finance, Accounting and Economics Terms, Total Reads: 324
Definition: Specific-Shares Method
Specific-Shares Method is a personal financial accounting method an investor uses to sell specific shares at specific times to reduce capital gains so that the taxes are less for an year. This is done through selling only those shares of a particular company which were bought at high cost thereby reducing the capital gain.
To understand better, if I have 200 shares of a company, 100 were bought at one time at 100$ per share and rest 100 were bought at 200$ per share at some other time. I have both dates and costs properly recorded with me and my broker. Now if i have to sell 100 shares now, normally i can sell any 100 at current market rate lets say 500$. Now if i sell set 1 i will have more capital gain as 400$ per share is the gain but if i sell the set 2 my gain per share is 300$. Multiplied by 100 it saves me 1000$ worth of capital gain for that year but saves my tax.
To e able to use this method investors must be able to identify specific-shares. Specific share identification is a method to locate the exact share to be sold from the holding which was bought and purchased in portions at different dates and different prices, in order to get the maximum tax benefit. This involves that the investor gives special instruction to his brokerage firm and to maintain a detailed record of all the sales and cost paid. It helps the investor to avoid capital gain taxes when selling a portion of the holding would result in a loss. The investor can decide on the method to be used to identify such shares depending upon the tax liabilities. Unless otherwise stated FIFO is the default method for sale of shares. Other less commonly used specific share identification methods are single-category averaging (used primarily by mutual fund companies) and double-category averaging.