Capital Gains - Mechanics of Selling By Tax Lots?

[clobber]

This is all related to T Rowe Price if it makes a difference.

After years of DCA into several mutual funds, I am considering selling some for the first time. These would consist of both covered and non-covered shares.

Currently my account settings for both covered and non-covered shares is "average cost." It is my understanding that because I have never sold any shares, that I should be able to change to specific tax lot identification. When I investigate how to do that, the website informs me that if I want to do specific lot, I will have to call them. It can not be done online.

I have a record of every transaction in a spreadsheet going back nearly 30 years. That includes the date of the transaction, number of shares, and price. However, I do not have any kind of "lot id."

1) Anyone done this before? I guess I am just sort of assuming that I can do this all over the phone by specifying the date and shares.

2) Are there any tax implications with the non-covered shares? For example, last year I sold some non-covered stock shares from a different brokerage. After I submitted my taxes with turbo tax, it basically freaked out because of the non-covered shares and told me I needed to mail in several forms -which I did, but it was all very confusing and frustrating. Especially because turbo tax only told me I needed to do that AFTER I filed.

[Retch The Grate]

Haven't done it on T Rowe, on Vanguard you just tell it to sell by specific lot and it has the full list online for you to pick from. I would expect if they require you to call that knowing the date and the size of the lot is all you will need to be able to identify it for them.

The deal with non-covered shares is you are responsible for reporting the sale of them to the IRS. Separately you report the cost basis of ALL shares, covered and non-covered that you sell in a tax year.

[COcheesehead]

Fidelity shows you every lot and the gain and loss. You enter a ticket with specific shares you select and it’s done. Super easy.

[clobber]

Quote:

Originally Posted by COcheesehead Fidelity shows you every lot and the gain and loss. You enter a ticket with specific shares you select and it’s done. Super easy.

I assume that is for covered shares only?

[COcheesehead]

Quote:

Originally Posted by clobber I assume that is for covered shares only?

All my shares have always been at Fido. One of the joys of consolidation.

[SecondCor521]

Not directly familiar with T Rowe Price. But I do volunteer tax prep for AARP Foundation Tax Aide.

The IRS requirements for specific ID is that you notify your broker before the transaction to indicate the specific lot you intend to sell. There usually isn't any sort of identifier - it's usually just the purchase date, and I suppose purchase price if you bought two lots on the same day, but since you're talking about mutual funds that part probably is not applicable.

I have not sold shares over the phone, but yes, you should just be able to identify the shares to the broker. Sometimes a broker may charge more for a phone-assisted trade, but if you point out that the only reason you're calling in is to use specific ID, they may be able to waive the additional charge.

I am mildly surprised that T Rowe Price doesn't let you choose specific ID as a cost basis method. I'd double check that with them on the phone before you start down the path of selling over the phone. It's more hassle and more subject to error to do it that way for everyone involved.

As far as tax reporting, you will need to report your covered shares and non-covered shares, and also long-term and short term separately, so you could have up to four sections on your tax return. Covered shares will usually be referred to as "Cost basis reported to the IRS" and non-covered shares will usually be referred to as "Cost basis NOT reported to the IRS" or similar language. Each of these combinations - {covered, non-covered} x {long term, short term} - will be reported on Form 8949, and the numbers from there will flow to your Schedule D.

For the non-covered shares, since your broker may not report basis to the IRS, you may need to supply (or correct) the basis on your tax return. Your tax software should have a place to enter the basis for non-covered shares.

It should be as simple as that - there should be no reason to send in any additional forms beyond the Schedule D and Form 8949s (which should be sent or included automatically by your tax software), so I'm not sure what exactly you're referring to about TT freaking out and asking you to send more stuff in.

...

As an aside, if you always do specific ID as a basis method, then you'll be fine. If you ever - EVER, even once - sell with average cost, then I believe you're stuck using average cost for that investment until you dispose of the entire holding. Beware.

[PaunchyPirate]

Clobber, I am not a TRP customer, butif you haven’t called TRP yet, it sounds like you need to call to have them do the switchover of your account holding to Specific ID. I don’t think they are saying you will have to call them to do a sell transaction.

For the “covered” shares, you should not have to provide them with data from your spreadsheet. They are supposed to have that data. That’s the definition of “covered”. I would expect that they want you to do the conversion via phone so they can make sure you know what is about to happen.

They MAY be willing to receive you individual lot data for the non-covered shares. Some brokers will let you supply the data or enter it yourself so that you can see it in their website. They don’t take responsibility for the accuracy, but it would be helpful to you. They won’t likely send the non-covered data to the IRS. You are the one responsible for entering that cost data and dates on your tax returns.

They also may not have a way to store the non-covered lot details for you.

They may only offer the ability to use the average cost value for all non-covered shares. In this approach, any sale from your non-covered shares would have the same share cost. Then a sale from the covered shares would use the share cost of that particular lot.

You do not need to generate a lot ID of any sort. Dates, # of shares, and price paid are the important things. If TRP generates or uses a lot ID, that’s up to them.

Assuming you go forward with the conversion, then you should be able to sell a specific lot of shares at the time you do your sale. You will likely be presented with a UI to pick and choose the desired lots to sell. I suppose it is possible that TRP’s website isn’t this sophisticated and that may force you to have to call them. You should discuss this with them when you call.

[clobber]

Quote:

Originally Posted by SecondCor521 I am mildly surprised that T Rowe Price doesn't let you choose specific ID as a cost basis method. I'd double check that with them on the phone before you start down the path of selling over the phone. It's more hassle and more subject to error to do it that way for everyone involved.

I agree and am just now investigating this whole thing. Not in too much of a hurry, which is why I posted here instead of just calling TRP. When I go into my TRP account and try to change from average cost to specific lot I get the following yellow warning. T Rowe Price have both "mutual fund" and "brokerage" accounts. It says:

Please Note: Specific Lot Identification cannot be selected online as a cost basis method for your mutual fund shares, except for shares held in a T. Rowe Price Brokerage account.

To sell or exchange shares using Specific Lot Identification as the cost basis method:

Ensure your current method is not set to Average Cost (if it is, you may change it online to another method such as FIFO)
Call us at 1-888-898-9677 to specify the shares for transaction.

Quote:

Originally Posted by SecondCor521 For the non-covered shares, since your broker may not report basis to the IRS, you may need to supply (or correct) the basis on your tax return. Your tax software should have a place to enter the basis for non-covered shares. It should be as simple as that - there should be no reason to send in any additional forms beyond the Schedule D and Form 8949s (which should be sent or included automatically by your tax software), so I'm not sure what exactly you're referring to about TT freaking out and asking you to send more stuff in.

2020 Tax year I got bit by what is described in this TurboTax thread. It is still unclear to me if this happened because I summarized covered transactions from one brokerage (I dont think so), or because I had one single non-covered sell from another brokerage (I think so). The short story from that thread is that after I filed my fed taxes electronically with TT (and it was accepted), Turbo Tax immediately told me I had to mail in some forms along with 1099s.

Quote:

Originally Posted by PaunchyPirate They MAY be willing to receive you individual lot data for the non-covered shares. Some brokers will let you supply the data or enter it yourself so that you can see it in their website. They don’t take responsibility for the accuracy, but it would be helpful to you. They won’t likely send the non-covered data to the IRS. You are the one responsible for entering that cost data and dates on your tax returns.

Yes - I had that done with TD Ameritrade once and it was very helpful. As you suggested - it still did result in some issues filing just because they are non-covered.

[SecondCor521]

You might see about changing your TRP account to a brokerage style account so you can use specific ID for your mutual fund shares. The only downside of doing this I know of (when I did something similar at Vanguard) is that you'll receive two sets of tax forms in the tax year which you change your account, which makes tax filing a bit of a hassle. But that hopefully is a one time thing.

On the TT thread you linked to, I think I generally understand what happened, but it's a bit complicated and probably not relevant to go into detail. Basically there is a limitation in TT and Intuit could either do the work to eliminate the limitation, or they can just direct taxpayers to mail in some extra paperwork. Intuit has chosen to not do the work as of the time of that thread, but they are at least keeping you compliant by having you send in the paperwork.

If you want to avoid that, you can either (a) report your transactions individually instead of summary, which may not be too bad if you can import them, or can type them in yourself if you don't have too many, (b) use a different tax prep product that doesn't have this limitation, (c) paper file, (d) avoid the situation that made the requirements apply to you - you can read all of the gory details if you want by searching for 8453 in the IRS instructions for Form 8949.