FGMK Tax Alert: The Senate Tax Proposal and an Important Year-End Capital Gain Planning Update

Article written by FGMK Tax Partner Charles F. Schultz III and Senior Tax Associate Jeffrey Golds

The Senate version of the "Tax Cuts and Jobs Act of 2017" includes a provision that would require taxpayers to use the first-in, first-out ("FIFO") valuation method with respect to any security sold, exchanged, or otherwise disposed of.  Specifically, effective January 1, 2018, taxpayers would be required to use the basis of the earliest acquired shares of any stock sold when determining capital gain recognition.   For many taxpayers, the earliest acquired shares also happen to be the shares with the lowest basis, resulting in greater capital gain recognition.

Under current law, taxpayers enjoy the ability to select specific shares for sale, thus allowing them to sell shares with the highest basis first so as to limit their capital gain recognition.  Furthermore, those taxpayers who hold shares of a Regulated Investment Company can mitigate their capital gain recognition by using an "average basis method" for determining gain.

To prevent the possible adverse impact that would arise with the passage of this provision, taxpayers who intend to sell stock holdings in the very near future should strongly consider accelerating these sales prior to year-end.  This will allow them to take advantage of the current tax law and prevent the possible increased capital gain recognition should this provision happen to pass.

For any questions or guidance regarding this issue, please feel free to contact a member of the FGMK Tax Practice for assistance.