What is the Specific-Shares Method?

The specific-shares method is a trading method used by investors for tax purposes and to reduce tax liability for a particular year to the barest minimum. Through this method, investors maximize their capital gains or capital losses when selling some parts of the shares of a company or fund. The specific-shares method allows investors to select the specific hares they want to sell off which will enable them to show their losses as high as possible and the gain as little as possible.

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How Does the Specific-Shares Method Work?

The specific-shares method is used by investors when selling off part of their holdings (shares) of a company, stock or fund. This method allows a specific selection of shares to sell off when an investor wants to reduce his holding (shares) of a company or fund. Usually, investors prefer selling shares that have the highest cost basis, by doing so, the sale will give a higher capital loss and a lower capital gain. Not all investors can use the specific-shares method when reducing their position in the stock, there are specific criteria that must be met before this method is used. Those conditions include;

• The investor must have multiple shares of a stock or company purchased at different prices.
• The investor must keep a record of all the shares purchases, their prices or cost basis.
• The investor can also sell some shares of the stock, especially those with the highest cost basis.

Two Options Within the Specific-Shares Method

When investors decided to use the specific-shares method when reducing their position in a stock, two options are available. These options dwell on the consideration of short-term capital gain and long-term capital gain. Although most investors prefer to sell shares with the highest cost basis to show a greater capital loss and a smaller capital gain, there are certain exceptions to this option. For instance, it is important that an investor considers the year the shares were purchased as this affects the tax liability that such an investor is exposed to.