For stock and mutual fund investors, owning multiple lots of shares raises multiple issues.
All shares of a particular class issued by a corporation or mutual fund are identical. They confer the same rights and have the same value. Yet they don’t always have the same tax characteristics. Shares bought at different times or at different prices make up separate lots. The tax consequences of a sale will differ depending on the lot sold.
Events producing multiple lots
It’s easy enough to see that you have multiple lots if you make purchases at different times and different prices. There are situations where it may be less obvious that you hold more than one lot of shares.
Split purchase. When you place an order to buy shares, your broker acquires them for you at the best price available. Sometimes the number of shares available at the best price is smaller than number you’re purchasing. You end up buying at more than one price even though all shares were bought at the same time pursuant to a single order. Normally you’ll be treated as having bought multiple lots of shares.
The tax regulations include a confusing rule under which your broker may provide a confirmation that reports the aggregate or average basis for shares bought the same day pursuant to the same purchase order but at different prices. When this happens, you have to use the average basis for those shares unless you notify the broker (before you sell the shares, and within a year after the purchase unless the broker allows more than a year) that you want to use the actual cost per share. We suspect that few brokers will make use of this poorly designed rule.
Dividend reinvestment. If you choose to have dividends reinvested, the tax law treats you the same as if you received the dividend in cash and then used the cash to buy more shares. This additional purchase results in a separate lot of shares.
Wash sale or other basis adjustment. Certain events may require an adjustment in the basis or holding period of shares you purchase. You can end up with multiple lots from a single purchase made at a single price if an adjustment applies to only some of the shares you purchased.
Example: You sold 100 shares at a loss, but 10 days later decided to purchase 300 shares of the same stock. The wash sale rule applies because you made this purchase within 30 days after selling at a loss. You can’t deduct the loss, and you have to adjust the basis and holding period of 100 of the shares you purchased. The other 200 shares are unaffected, so you have two lots: 100 shares with adjusted basis and holding period, and 200 shares with no adjustment.
Issues for multiple lots
Several issues come up when you hold more than one lot of the same stock or mutual fund:
- Covered and noncovered shares. Some lots of shares may be covered by the rules requiring brokers to report basis and holding period, while others (typically shares acquired before these rules took effect) may not. The distinction is important for reasons that extend beyond the question whether the broker will report basis and holding period when you sell the shares, because the regulations generally treat these two categories of shares as if they were held in separate accounts.
- Maintaining basis. As a general rule, each lot of shares has its own separate basis. You’re allowed to use the average basis method for mutual fund shares, though, or for stock held in dividend reinvestment plan.
- Holding period. Even if all your shares have the same basis, you may have lots with differing holding periods, so that some are short-term and some are long-term.
- Order of disposition. To determine your basis and holding period when you sell a portion of your holdings of a particular stock or mutual fund we need to know which lots were sold. Generally you’re treated as selling the oldest shares first, a method known as first-in, first-out or FIFO. Unless you’re using the average basis method, however, you’re allowed to sell in a different order by identifying lots at the time of the sale.