Late last night, word from House Ways and Means Committee Chairman Brady’s staff was that the FIFO proposal has been dropped from the tax bill. We’re still awaiting the official announcement, but expect it to be confirmed this morning.
Now that retail investors have been spared mandatory first-in first-out lot relief, a word about investors’ use of Specific ID for tax management: it’s woefully underutilized. In a recent Scivantage study of 16,000,000 retail accounts, fewer than 10% of investors have ever made a trade using Specific ID.
Furthermore, over a 3-year period, 340,000 trades totaling over $1.2 billion were completed that either resulted in a loss within 7 days of becoming long-term or in a gain 7 days before a lot would have become long-term. In other words, due to the difference in short- and long-term tax rates, these accounts may have paid $161 million in excess tax if those investors were simply middle income, and as much as $250 million if they were in the top tax bracket. This activity created a tax drag on after-tax performance which, in many cases, could have been avoided by better tax management.
The bottom line is that most investors are not properly managing their investment accounts to minimize taxes. The irony of the failed FIFO proposal may ultimately be that the backlash against the proposal drew a significant amount of attention to Specific ID, which could lead to an increased awareness of tax management and, by extension, a reduction of tax revenue flowing into the IRS coffers.