Getting a Tax Break

A large number of online brokers still don’t give investors much choice on the accounting treatment of their stock sales.

When we recently surveyed our readers about what they most wanted from their online brokers, a majority said they were concerned about the new Internal Revenue Service cost-basis regulations that go into effect this year.

Brokers are now required to report the cost basis of any of your stock holdings to the IRS when you sell them. Those cost-basis reporting requirements will be extended to mutual funds in 2012 and to options in 2013.

On the face of it, having your broker report your cost basis should help at tax time. You won’t have to dig around and figure out how much you paid for a certain stock because it will be right there on your 1099. In theory, at least, the new requirement is straightforward. But it opens up quite a few cans of worms.

One feature we look for when we review online brokers–either individually or as part of our annual rankings (the next one is due out March 14)–is the ability to choose which lot of stock you’re selling at the time you place your closing order. For instance, if you’ve been piling up shares of General Electric (ticker: GE) over time, purchasing several hundred a year for the past 10 years, you will want to specify exactly which batches of those shares you’re selling.

THIS IS AN IMPORTANT ISSUE. You may want to choose the highest-cost lots of stock that you’ve held for more than a year to minimize your capital-gains tax. Or you may want to sell your cheapest lots and just take the tax hit now. If you’re the sort of investor who buys the same stock, especially if you plan to hold it for the long term, being able to choose which shares you’re selling will help you control your taxable income each year.

Most brokers have you set up your cost-basis system when you open an account, selecting LIFO (last in, first out), FIFO (first in, first out) or average cost as their system of tax reporting. But few brokers let you choose which shares you are actually selling when you close a position.

Among those that have built the capability into their platforms: E*Trade (, Fidelity (, MB Trading (, optionsXpress (, Muriel Siebert (, Charles Schwab ( and TD Ameritrade (

OptionsHouse ( is rolling out a new platform this month that lets a customer pick a tax lot.

Brokers that focus on active traders, such as Interactive Brokers ( and Lightspeed Trading ( don’t let you choose a tax lot, but they also don’t expect their customers to hold onto their positions for very long.

AS STEVE SANDERS, vice president at Interactive Brokers, explains, choosing a tax lot before a trade just isn’t very important to his customers, though it may be to other sorts of traders. Because IB clients typically buy and sell very quickly, “our customers wouldn’t have time to choose lots before a trade,” Sanders notes. Instead, the customers can let IB’s computer decide how to match a particular trade to specific tax lots.

In fact, few brokers who focus on buy-and-hold investors make it easy to link trades and tax lots.

For example, to assign a tax lot, a Scottrade ( customer must call the firm the day after a trade. And quite a few, including Firstrade, eOption, Cobra Trading and TradingBlock, either don’t allow you to choose or ask you to call a broker.

The bottom line: Make sure that your online broker offers you the tools you need.

Posted by on 02/26 at 10:03 AM






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