As the U.S. Senate attempts to pass its tax reform bill this week, TD Ameritrade, which AMDG Financial uses as a custodian for our brokerage accounts, announced that it strongly opposes a provision in the Senate Tax Cuts and Jobs Act. Section 13533 of the Senate Bill deals with the cost basis that investors use to sell stocks they have purchased in different lots over time. At present, investors can choose the order in which they sell those different lots of the same stock, but under Section 13533, stocks will need to be sold in the order in which they were purchased. This cost methodology, known as “first in, first out,” or FIFO, would affect all sales of securities and mutual funds by individual investors.
TD Ameritrade believes Section 13533 will harm investors and could potentially result in an increased tax burden, in which the average investor would pay the highest capital gains taxes where a stock has appreciated over time. The company provided this example:
An individual holds a significant amount of a company’s stock, accumulated over a 20-year career. Now retired, this shareholder wants to sell some company stock to diversify his or her portfolio. Assume the purchases over time range from $5 per share up to $90 per share, but the stock now is trading at $50.
If the stock is sold at $50, rather than being able to take losses on the stock purchased above $50, the Senate Bill could require this individual to pay capital gains taxes on the appreciation of the stock from $5 to $50. That is, even if the shareholder has experienced sizeable paper losses on the purchases above $50, the Senate Bill might force him or her to pay taxes calculated on the largest gains possible.
We agree with TD Ameritrade that this is not fair. We, too, feel the Senate should stand up on behalf of individual investors and reject imposing a FIFO cost basis requirement on the sale of securities.
What Can You Do?
If you are also concerned about these proposed changes, you can contact Senators Debbie Stabenow or Gary Peters, or the congressional representative for your district to voice your opinion. In addition, TD Ameritrade has created a website that will enable individual investors to stay informed and easily reach out to their government representatives on issues that matter to them. The site hosts a summary of current issues, along with template letters.
If you have questions about how tax reform could affect your situation, please feel free to contact us. We’d be glad to help.
TD Ameritrade and AMDG Financial are separate and unaffiliated firms, that are not responsible for each other’s services or policies. TD Ameritrade does not recommend or endorse any advisor that utilizes its brokerage or custodial services. TD Ameritrade does not monitor, and is not responsible for communication between advisors and their clients. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto - Dominion Bank. All rights reserved. Used with permission.