are stocks taxed when sold?
How are stocks taxed when sold? Is it an average
cost per share if the investor "dollar cost averaged"
when purchasing? Can I sell 100 shares and take the loss using the
lowest price paid per share? -- Merilyn
Dollar cost averaging is the process of buying
a set dollar amount of stock on a periodic basis. Since the value
of stock fluctuates, each purchase results in a different number
of acquired shares.
When you sell less than the entire position in a stock,
you need to allocate a cost to the shares sold. In the case of stock,
this is done either by specific identification or on a first-in,
Specific identification means that you identify particular
shares to be sold. If you had the actual shares in your hand, you
would do this by delivering those shares to your broker for sale.
The cost would be the cost of the lot of shares so delivered.
However, since most stock is held in street name by
your broker, specific identification involves instructing your broker
to sell shares acquired on a particular date. You should note, though,
that if you identify stock held less than a year, your capital
gain is short-term, meaning it's taxed at ordinary
On a first-in, first-out basis, the stock that you
first acquired is treated as sold. If the value of the stock is
rising, this results in your recognizing more gain or less loss.
Depending on your circumstances, either method may be beneficial
or detrimental. For example, selling the first shares might result
in a long-term gain, whereas specific identification could result
in a lesser gain -- but at short-term rates.
Average costing is available only with mutual
fund shares. In this case, you would use the average cost of all
shares acquired, including dividend reinvestments, through the date
of the first sale. You can read more on cost basis of stock starting
on page 41 of IRS
Publication 550, Investment Income and Expenses.