Most taxpayers recognize capital gain or loss for tax purposes when they close a position. If an asset is sold for less than its purchase price, then the difference is considered a capital loss. If an asset is sold for more than its purchase price, then the difference is considered a capital gain. Gain or loss is equal to proceeds minus the adjusted cost basis of the position.
Gain or Loss = Proceeds – Adjusted Cost Basis for Each Tax Lot
Gains and losses resulting from trades are based on “matching lots.” A tax lot is the record of details of a purchase. Each acquisition of a security, on a different date or at a different price, constitutes a tax lot. Tax lots are used to determine the cost basis and holding period when you dispose of securities.
When you sell a security, if you don’t sell all of the shares that you own you must match the sale to a tax lot or lots in order to determine your gain or loss as well as your holding period.
The IRS allows two basic methods for matching tax lots: First in, First out (FIFO) and Specific Identification.
The Tax Optimizer lets you use Specific Identification directly by letting you change the tax lot-matching method for a specific position, and manually select tax lots to match. You can also use Specific Identification by choosing among several available lot matching algorithms.
Once lots have been matched, the gain or loss for that lot equals the proceeds minus the adjusted cost basis for each lot.
The period from the purchase to the sale is the holding period.