Another Hidden Tax in Tax Reform: It Will Cost Individual Investors But Not Investment Firms

The Senate Finance Committee has decided that a little-known provision that would change tax rules on certain securities sales shouldn’t apply to mutual-fund firms. Even so, it would still apply to individual investors, reports The Wall Street Journal.

The provision would prevent investors from
minimizing taxes, when they sell part of a position, by choosing the specific shares being sold. Instead, investors would have to sell their oldest shares first.

As first proposed, the change would have applied to fund companies as well as individuals.

But, according to WSJ,  senators exempted fund firms after some of the largest ones, including Vanguard Group and Eaton Vance Corp. EV 0.56% , protested.

“This would be another blow to individual investors, who are already suffering from the delay in the fiduciary-standard rules,”  Joe Ziemer, a vice president of Betterment, told WSJ.

Here are the specifics of the change as detailed by WSJ:

Say an investor owns two lots of a sector fund bought at different prices, and they are in a taxable account rather than a tax-deferred retirement account. If the fund is trading at $90 per share now, each one acquired five years ago for $65 would have a $25 taxable gain.

But each share bought two years ago for $110 would have a $20 loss.

Under current law, investors can choose which fund shares to part with. So selling the ones that cost $110 would produce a loss to offset other gains, while selling the ones that cost $65 would produce a taxable gain.

If the provision is enacted, the first shares sold would be assumed to have a cost of $65 each, and the investor couldn’t sell the $110 shares until the $65 shares were gone.

The provision would, however, allow investors in funds and dividend-reinvestment plans who can use the “average cost” method of computing taxable gain to continue to use it...

The change would also affect taxpayers’ ability to maximize the value of charitable donations of appreciated shares.

Under current law, investors often can skip paying capital-gains tax on donated shares, while getting deduction for their full market value. But the best shares to give may not be the first acquired.

Trump tax reform is a scam it is mostly about shifting the points of taxation with tax breaks for Trump and his crony buddies.
   -RW