| Specific Identification Method |
The Specific Identification method
is the most flexible in terms of
controlling your tax liability. You
can pick and choose which tax lots
you want to sell based on how much
taxable gain or loss you want to
recognize.
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To use this method, you need to do two things:
1. Keep good cost basis records.
2. Identify the specific tax lot (meaning the purchase date of the shares that you want
to sell) and inform the broker before the trade is executed. This is called a "versus
purchase" trade. It is often denoted by "VSP" with the original tax lot purchase date
printed on the trade confirmation for the sale in order to document that the
specific identification method was used. It is a good idea to remind your broker
that you want the "VSP" and tax lot date to appear on the trade confirmation for tax
purposes.
This method is the most useful one for minimizing your income tax liability. If you need
to liquidate some shares, you can choose the highest cost ones (which were usually the
most recent purchases) as your tax lots.
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