Tax Lot Management

Selecting specific tax lot(s) when selling company stock gives you greater control of your tax bill.

Strategy Overview

When you sell company stock (or any holding for that matter), if you've purchased the shares at different points in time (and at different prices), you have a strategic choice to make: which tax lot you would like to sell. Most brokerage firms utilize a rules-based system (e.g. first-in-first-out ("FIFO") or last-in-first-out ("LIFO")) for automatically selecting the lot, but also give you the choice to override the default and choose which specific lot(s) you'd like to sell (called "specific lot identification"). Selecting the tax-optimal lots to sell, specific to your overall tax plan and situation, can have a large impact on both (1) managing your capital gains tax brackets, and (2) conducting tax-loss-harvesting.

Tax Details

Each RSU vesting event or ISO/NSO exercise creates a separate tax lot: (i) the specific date, (ii) the share price that day --> so its relatively common for technology workers to have a number of different tax lots for their company stock holdings. When selling, by overriding a brokers default FIFO/LIFO and instead specifying "specific identification", you gain more control over the tax impact the sale will have. The key to optimizing taxes when selling company stock is to know what tax outcome you're optimizing for, and then identifying which specific tax lots to sell to best accomplish that outcome.

1. Ensure you only sell shares held more than one year to achieve long-term capital gains

2. Ensure shares from ISO exercises are not sold until they meet the dual criteria for a qualifying disposition

3. Optimize your tax-loss-harvesting in a variety of ways (most times selling shares with losses to pair against gains; but in less common situations potentially selling shares with gains to offset other realized losses)

4. In certain situations, manage complex AMT tax dynamics

Key Benefits

• Increased control over your tax bill

• Ability to improve the impact of tax-loss-harvesting

• Ability to defer a greater portion of capital gains to future tax years

Key Considerations/Flags

• Determining the optimal tax lot(s) to sell requires a detailed analysis based on your financial goals, tax brackets, and more

• Specific lot identification can be complicated (typically requires overriding broker default methods like FIFO or LIFO)

• If shares are via NSOs, ensure you are using your adjusted basis vs. your broker basis

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• You have received multiple equity grants over time with different vesting schedules and/or exercised options at different times. This creates many tax lots with varied cost bases (and more opportunity for strategic identification to add value).

• You have realized both short-term capital gains and losses across your equity holdings. Tax optimization depends on pairing the two. Similarly, having both long-term capital gains and losses allows offsetting at preferential rates.

• You hold both ISOs with potential capital gains treatment and NSOs that generate ordinary income.

• You want to proactively optimize the amount of capital gains/losses realized each tax year.

🔴 When to Not Use This Strategy:

• You have very simple equity grant history. If you only have 1 tax lot, no optimization opportunity exists.

• You don't know how to correctly select the right tax lots (and don't have an advisor to help you).

Example