Using the specific share method, you can identify the actual shares you want to sell to minimize your capital gain or maximize your loss. If the price of the stock or mutual fund shares that you’re selling has fluctuated over the years, using this method could be advantageous for you.
The IRS has spelled out specific rules regarding this method of tracking basis:
When you request the sale, you must tell the fund or your broker exactly which shares you’re selling. If you don’t specify the shares prior to selling them, the IRS will assume that you used the first in, first out method.
Make sure that you receive written confirmation of the shares you specified from the fund or your broker within a reasonable time.
Example: You purchased 1,000 shares of a fund for $12 a share in 2005. You purchased another 500 shares of the same fund for $15 a share in 2006, and another 900 shares for $27 in early 2007.
In late 2007, you decide to sell 900 shares at $26 a share and receive a check for $23,400. If you use the first-in first-out method, you’ll show a capital gain of $12,600:
$26 (Market value) – $12 (Amount you paid) X 900 shares = $12,600
Now, if you specifically state that you want to sell the 900 shares you purchased in early 2007, you’ll show a loss of $900 on your tax return:
$26 (Market value) – $27 (Amount you paid) X 900 shares = –$900
Base your decision on your tax situation.