Understanding Specific Share Identification
Cost basis can be calculated using specific-share identification, but only for attentive investors.
You can ask a mutual fund or broker to sell certain shares provided you’ve kept meticulous records of when and how much you paid for your stock or fund shares. These shares would often be the ones you paid the most for since they would provide the least amount of taxable capital gains.
Read on as we take a deeper look into understanding specific share identification. We’ll cover how specific share identification works, its advantages and disadvantages, and answer some frequently asked questions.
Table of Contents
- Specific share identification is an accounting strategy that investors use to try and get the best tax treatment.
- The specific share identification strategy is often used when investors decide to sell off some of their holdings.
- Investors can only use specific share identification if they’re selling holdings of the same asset.
- Using the specific share identification strategy provides additional flexibility for investors but can require tedious and time-consuming record keeping.
What Is Specific Share Identification?
Specific share identification has to do with a type of investment accounting strategy. In this case, investors search for and try to obtain the most favorable tax treatment. Investors do this when they sell various holdings that they purchased at various prices and at different times.
How Specific Share Identification Works?
Investors use specific share identification as a tax savings strategy. This helps investors to lower their financial burden during tax time when they decide to sell their holdings. But in order for this to be possible, those holdings must have been purchased at various times and at different prices.
Any profits earned from the sale of an asset are subject to capital gains taxes. So, if you purchased a stock for $20 and later sold it for $40, you would have a capital gain of $20, which is a taxable amount.
Specific share identification would work like this:
- An investor decides to purchase 20 shares of a specific stock per-year for three consecutive years
- Each year the investor owns the stock, the per-share price—or cost basis—increases by $20
- In year one, 20 shares purchased at $20 each is an investment of $400
- In year two, 20 shares of the same stock, now at $40 per-share, is an investment of $800
- In year three, 20 more shares of the stock, now at $60 per-share, is an investment of $1200
Now that the investor has different groups of shares, the capital gains can vary if the investor wants to sell. This is where using the specific share identification method comes into play. The investor can use it to optimize their investment strategy and get the best tax treatment on any capital gains.
Advantages of Specific Share Identification
The specific share identification strategy can bring a range of benefits to investors. The three biggest advantages of specific share ideation for investors are its ability to:
- Maximize losses
- Minimize gains
- Realize long-term instead of short-term gains
No matter which goal the investor has, any of these events or strategies will help lower their tax bill. As well, using the specific share identification strategy can help investors take advantage of tax-loss harvesting. This is when an investor chooses to sell a share at a loss to help offset a capital gains tax liability.
Essentially, specific share identification helps investors gain better control over the timing and amounts of their capital gains and losses, allowing them to trigger, create, and initiate losses or gains by implementing this strategy. It helps investors paint a clearer picture of their holdings overall, allowing them to make more informed decisions regarding their investments.
Disadvantages of Specific Share Identification
The biggest disadvantage to the specific share identification strategy is that it can be incredibly time-consuming and meticulous to keep accurate records. So while it can bring the most advantageous tax-efficient results, there is a lot that needs to get done to reap the rewards.
Not every investor has the opportunity or time to keep track of specific share identification, meaning it can be difficult to implement this strategy.
Specific share identification is a type of accounting strategy that investors implement to gain the most favorable tax treatment on their holdings. Investors can only use the specific share identification method for the holding identical assets (such as publicly traded shars) that were purchased at different prices at different points in time.
Keeping track of specific share identification is a meticulous process to take on, but it has the benefit of providing additional flexibility for investors. Ultimately, specific share identification helps investors optimize their tax treatment if they sell various holdings and assets.
FAQs About Specific Share Identification
It is vitally important to this accounting strategy to keep accurate, comprehensive details and documentation of your holdings. You can contact your brokerage to find the statements with your actual cost basis if you don’t have the right records.
Yes, you can choose which share you want to sell. However, depending on the approach you take there can be varying requirements. For example, you can only sell holdings using the specific share identification method if the assets are part of a holding purchased at different times and prices.
Usually, it makes the most sense to sell your oldest shares first. However, it’s important to remember that this isn’t always the most tax-efficient approach. If the cost base of your oldest shares is the lowest of your holdings of that share, you’ll trigger the largest gain by selling them. On the other hand, if your oldest shares have the highest cost base of your shares of that holding, you will trigger the lowest gain—or potentially trigger a loss.
Generally speaking, traded shares on exchanges like NASDAQ, Dow, or TSX will sell fairly easily. If you put in a sell order at market rate, the transaction will normally go through in just a few minutes. Of course, it’s still possible that there won’t be a buyer, but this is uncommon and generally won’t be a problem in most trading situations.
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