Investing and Taxes: Continued

TL;DR: Follow the steps at the end to change your Schwab account to automatically help you with optimal taxation

Last time we talked about short-term vs. long-term capital gains.

However, imagine this scenario. You bought 10 shares of AAPL stock in 2014 at a price of $75. You buy another 10 shares in 2018 at $222. It is now trading at around $160, and you decide to sell 10 shares.

When it comes to taxation, is this a short-term or long-term gain or loss?

The answer is it depends. The default most accounts give you is FIFO (first-in-first-out), which would mean that you are selling the shares you bought in 2014. This would be a long-term capital gain.

Going off the principles of the last post, you like having short-term losses and long-term gains. However, since money now is better than money later, you may rather take a capital loss instead of a capital gain (all else equal).

i.e. You may want to make this sale of AAPL stock into a short-term loss instead of a long-term gain!

Good thing you can change the default FIFO method setting to other ones (such as LIFO, or last-in-first-out). Using a different method will change what your cost basis is, and therefore what your tax liability is that year. You can even go the extra mile and specifically specify which shares of stock you are actually selling.

On Schwab: you can actually go to Services and click on Account Settings. From there you can change your default cost basis method. Their “Tax Lot Optimizer” I think is pretty good, where they try to close positions generally with losses before gains, and short-term/long-term the way most people want it. You can also override your default on any specific trade you make.

Happy Investing!

TheJKW