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Senate bill would force (and tax) FIFO stock sales

Not hearing much about this yet in the financial press -- but I think this is a bad idea. Here's hoping it doesn't make it into the final proposal! (x-posted to M* too)

Senate bill boosts taxes on stock sales

Under the proposal, investors would have to sell their oldest shares first, which typically results in a larger capital gain. The change would raise an estimated $2.7 billion over 10 years.

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The provision would eliminate the specific identification method, meaning stock investors would now be required to sell their oldest shares first. This also would mean that mutual fund managers would also lose the ability to pick specifically which shares to sell. The change would take effect Jan. 1.

"Requiring taxpayers to treat securities as sold on a first-in, first-out basis would be disproportionately harmful to ordinary Americans who invest with funds," said Paul Schott Stevens, president and CEO of the Investment Company Institute.

"It would increase significantly the amount of taxable distributions made to investors every year and tie the hands of fund managers as they pursue investment strategies on behalf of savers."

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  • Hmm...for someone who always uses FIFO, one less thing to worry about:-)
  • Gosh, you don't think this is really tax simplification? According to the article, you'll still have a choice between average cost and FIFO for mutual funds. Since the fund companies and brokerages typically use average cost by default, that might make things harder for you. You might have to compute your cost basis (since you're selling FIFO) yourself.

    Who knows, Congress might even bring back double category average cost and the arcane rules about when you can switch from one method to another.

    I wonder if this would also affect the ability of ETFs to be tax efficient. When they sell creation units to authorized participants, would they have to dump their oldest shares rather than their most expensive shares?

  • The analyst on NBR tonight said if it was to pass, that yeah, it would not be good for ETF tax efficiency benefits. So we'll have to wait and see if this gets killed in committee or what.
    msf said:

    I wonder if this would also affect the ability of ETFs to be tax efficient. When they sell creation units to authorized participants, would they have to dump their oldest shares rather than their most expensive shares?

  • msf
    edited November 2017
    I'm still looking for the FIFO rule in the Senate proposal. Here's the 10PM Nov. 14th (Tues) draft. I find all sorts of other things that articles highlight, but I'm not seeing the reported stock sale proposal. (There's a lot on stock options, but that's something different.)

    Three possibilities: (1) I'm skimming too quickly and it's in there; (2) it's in another draft (earlier or later, we don't know); or (3) this is a figment of someone's imagination. I'm curious enough to keep looking, at least for now.

    Journal of Accountancy summary with link to Senate proposal:

    Linked Senate proposal: SFC Chairman's Modification.pdf

    Edit: Here's the Senate Committee on Finance press release, that contains the proposal (same link as above) and a scoring of it. That scoring, on p. 4 (of 10) shows the FIFO proposal as item H(3). That shows that I'm looking at the right version of the senate draft, I still don't see where this item is coming from, though.


    Scoring: Chairman's Modified Mark Score.pdf
  • There are (at least) two different "Chairman's mark" of the senate tax proposal. The original, release Nov. 9th, includes the FIFO proposal. The second, much shorter version, released Nov. 14th, does not.

    I don't know if the latter is just modifications to the first (i.e. to be read in conjunction with the first), or a complete replacement.

    Here's the original Nov 9 PR with links (including the 253 page version):

    and the later Nov 14 PR with links to the chairman's modified mark (103 page version):

    The proposed FIFO rule begins on p. 113 of the original draft. It's poorly written, as it says that "a taxpayer ... generally is permitted to ... determine the basis of RIC [mutual fund] shares sold under one of two average-cost-basis methods ..." It cites Treas. Reg. sec 1.1012-1(e).

    Wrong. That regulation prohibits using average cost, double category, until after April 1, 2011. It's been years since two average cost methods have been allowed.

    That's not just the way I read the regs. That's the way H&R (and many others) read them:
  • How one reacts to tax reform proposals always depends on whose ox is being gored. I'm no different from any other taxpayer trying to figure out what the salauds in Washington are trying to do to me. So far, I don't like what I see: limitation on property tax deduction, elimination of state income tax deduction, reduction of higher education credit, and now maybe losing the ability to sell whatever lots of stocks or funds I want. The Republicans failed to follow procedures in bringing a health care proposal for a vote and they've done the same thing with tax "reform." I am quite disenchanted (i.e., pissed off).
  • (MO'Brien WaPo)

    There's an easy way to tell the Republican tax plan from the Republican health-care plan.
    The first one would cut the corporate tax rate to help mostly wealthy investors, and pay for some of that by cutting health-care spending for the poor and the middle class. The second one, on the other hand, would cut health-care spending for the poor and the middle class to pay for the capital-gains tax cuts it would give to mostly wealthy investors.

    There's only one plan, surprise surprise:
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