Taxes on a Slightly Complicated Stock Market Play
May 30, 2009 6:59 AM   Subscribe

How does one handle the tax situation when frequently buying/selling small stakes of a stock in which you are also holding a long term large stake?

Hypothetically: say I've owned 5000 shares of a company for five years, so any gains are now long term. Say the stock price is constantly swinging by 5%, and will continue to do so for 4 months or so. Say at that point, it will break the cycle and shoot skyward.

Just to keep things simple, let's not challenge any of those assumptions.

Say I want to not only profit by the shoot-up in four months time, but also from the swings in the meantime, by setting a sell order for 500 shares at the higher edge of the swing range, and a buy order for the bottom....and repeating over and over in the months ahead.

One complication: if/when the stock at any time dips REALLY low, I will buy another 2000 shares to hold long term. And I will hold my 7000 shares for at least a year after the stock shoots up. But if I get caught out, and don't manage to rebuy my 500 in-and-out shares in time for the shoot-up (and so I have only 6500 shares), that's ok.

My question is how I'd handle this, tax-wise. I'm figuring I'd deem myself to be buying/selling DIFFERENT shares with each cycle, so I can pay long term capital gains tax on each sale profit. After four months, my entire stake (or nearly all) may be new and short term, but, per above, I don't intend to sell for another year, anyway, so it'll all mature before eventual sale.

Without challenging my assumptions about the stock price, does this make sense, tax-wise?
posted by jimmyjimjim to Work & Money (4 answers total)
Best answer: Yes, this works. You just have to keep track of each "lot" of shares so you know the buy and sell dates. Also, it'll add some paperwork to your Schedule D.
posted by Durin's Bane at 7:07 AM on May 30, 2009

Response by poster: Right, thanks, yeah, I was figuring that by at least keeping very careful records I could hash it all out better later. And I've learned not to count on my brokerage for that.

I suppose I should set both the buy order and the sell order at the same time, rather than have to keep returning to my brokerage account web page for each side of this volley?
posted by jimmyjimjim at 7:15 AM on May 30, 2009

Best answer: Your broker may actually track lots for you. In fact, most brokerages that do this refer to the lots as "tax lots" because you use them to minimize the taxes you owe. I have a Wells Fargo brokerage account and they track when you buy each lot of shares, and I can choose which lot to sell shares from.

Beware of the "wash sale" rule though -- if you sell any shares at a loss, you may not be able to deduct that loss if you purchase the same security within 30 days before or after that sale.
posted by kindall at 10:28 AM on May 30, 2009

Response by poster: Thanks, Kindall, that's definitely something I need to bear in mind. Much appreciated. Thanks to both of you!
posted by jimmyjimjim at 6:58 PM on May 30, 2009

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