Examples

Instructions

This topic presents an example of a group of trades and what the gain and loss would be under each of the following six lot-matching methods:

Basic Scenario

A client makes the following purchases:

  • Lot 1: Jan 15, 2011: 1 Share of ABC at $10.

  • Lot 2: Mar 15, 2011: 1 Share of ABC at $40.

  • Lot 3: May 15, 2011: 1 Share of ABC at $30.

  • Lot 4: Jul 15, 2011: 1 Share of ABC at $20.

The same client makes the following sales:

  • Sale 1: April 15, 2012 at 10:00AM: 1 share of ABC at $25.

  • Sale 2: April 15, 2012 at 12:00PM: 1 share of ABC at $35.

  • Sale 3: April 15, 2012 at 2:00PM: 1 share of ABC at $15.

Click the drop-down menus below to see examples based on the scenario above.

Under the FIFO lot-matching method:

  • Sale 1 is matched with Lot 1 for a long-term gain of $15.

  • Sale 2 is matched with Lot 2 for a long-term loss of $5.

  • Sale 3 is matched with Lot 3 for a short-term loss of $15.

The client therefore has a net long-term gain of $10, a net short-term loss of $15, and a basis of $20 and holding period starting July 15, 2011 for the remaining open lot.

Under the LIFO lot-matching method:

  • Sale 1 is matched with Lot 4 for a short-term gain of $5.

  • Sale 2 is matched with Lot 3 for a short-term gain of $5.

  • Sale 3 is matched with Lot 2 for a long-term loss of $25.

Client has a net long-term loss of $25, a net short-term gain of $10, and a basis of $10 and holding period starting January 15, 2011 for the remaining open lot.

Under the Maximize LT Gain lot-matching method:

  • There are four possible matches for Sale 1:

  • Lot 1 would result in a long-term gain of $15

  • Lot 2 would result in a long-term loss of $15

  • Lot 3 would result in a short-term loss of $5

  • Lot 4 would result in a short-term gain of $5

The only possible long-term gain for Sale 1 is Lot 1, so Sale 1 would be matched with lot 1 for a long-term gain of $15.

  • There are three possible matches for Sale 2:

  • Lot 2 would result in a long-term loss of $5.

  • Lot 3 would result in a short-term gain of $5.

  • Lot 4 would result in a short-term gain of $15.

None of the possible matches results in a long-term gain. The second priority for the Maximize LT Gain matching method is to maximize short-term gain.

Sale 2 would be matched with Lot 4 for a short-term gain of $15.

  • There are two possible matches for Sale 3:

  • Lot 2 would result in a long-term loss of $25.

  • Lot 3 would result in a short-term loss of $15.

None of the possible matches results in a long-term gain and none of the possible matches results in a short-term gain, so the matching method chooses based on its third priority, minimize short-term loss.

Sale 3 is matched with Lot 3 for a short-term loss of $15.

Client has a net long-term gain of $15, no net short-term gain or loss, and a basis of $40 and holding period beginning on March 15, 2011 for the remaining open lot.

Under the Maximize LT Loss lot-matching method:

  • There are four possible matches for Sale 1:

  • Lot 1 would result in a long-term gain of $15.

  • Lot 2 would result in a long-term loss of $15.

  • Lot 3 would result in a short-term loss of $5.

  • Lot 4 would result in a short-term gain of $5.

The only possible long-term loss for Sale 1 is Lot 2, so Sale 1 is matched with Lot 2 for a long-term loss of $15.

  • There are three possible matches for Sale 2:

  • Lot 1 would result in a long-term gain of $25.

  • Lot 3 would result in a short-term gain of $5.

  • Lot 4 would result in a short-term gain of $15.

None of the possible matches results in a long-term loss. The second priority for the Maximize LT Loss matching method is to maximize short-term loss. None of the possible matches results in a short-term loss.

The third priority for the Maximize LT Loss macro is to minimize short-term gain.

Sale 2 is matched with Lot 3 for a short-term gain of $5.

  • There are two possible matches for Sale 3:

  • Lot 1 would result in a long-term gain of $5.

  • Lot 4 would result in a short-term loss of $5.

None of the possible matches results in a long-term loss. The second priority for Maximize LT Loss is maximize short-term loss.

Sale 3 is matched with Lot 3 for a short-term loss of $15.

Client has a net long-term loss of $15, no net short-term gain or loss and a basis of $10 and holding period starting January 15, 2011 for the remaining open lot.

Under the Maximize ST Gain lot-matching method:

  • There are four possible matches for Sale 1:

  • Lot 1 would result in a long-term gain of $15.

  • Lot 2 would result in a long-term loss of $15.

  • Lot 3 would result in a short-term loss of $5.

  • Lot 4 would result in a short-term gain of $5.

The only possible short-term gain for Sale 1 is Lot 4, so Sale 1 would be matched with lot 4 for a short-term gain of $5.

  • There are three possible matches for Sale 2:

  • Lot 1 would result in a long-term gain of $25.

  • Lot 2 would result in a long-term loss of $5.

  • Lot 3 would result in a short-term gain of $5.

The only possible short-term gain for Sale 1 is Lot 3, so Sale 2 is matched with Lot 3 for a short-term gain of $5.

  • There are two possible matches for Sale 3:

  • Lot 1 would result in a long-term gain of $5.

  • Lot 2 would result in a long-term loss of $25.

None of the possible matches results in a short-term gain. The second priority for the Maximize ST Gain matching method is to maximize long-term gain.

Sale 3 is matched with Lot 1 for a long-term gain of $5.

Client has a net long-term gain of $5, a net short-term gain of $10, and a basis of $40 and holding period beginning on March 15, 2011 for the remaining open lot.

Under the Maximize ST Loss lot-matching method:

  • There are four possible matches for Sale 1:

  • Lot 1 would result in a long-term gain of $15.

  • Lot 2 would result in a long-term loss of $15.

  • Lot 3 would result in a short-term loss of $5.

  • Lot 4 would result in a short-term gain of $5.

The only possible short-term loss for Sale 1 is Lot 3, so Sale 1 is matched with Lot 3 for a short-term loss of $5.

  • There are three possible matches for Sale 2:

  • Lot 1 would result in a long-term gain of $25.

  • Lot 2 would result in a long-term loss of $5.

  • Lot 4 would result in a short-term gain of $15.

None of the possible matches results in a short-term loss. The second priority for the Maximize ST Loss matching method is to maximize long-term loss.

Sale 2 is matched with Lot 2 for a long-term loss of $5.

  • There are two possible matches for Sale 3:

  • Lot 1 would result in a long-term gain of $5.

  • Lot 4 would result in a short-term loss of $5.

Sale 3 is matched with Lot 4 for a short-term loss of $5.

Client has a net long-term loss of $5, net short-term loss of $10 and a basis of $10 and holding period starting January 15, 2011 for the remaining open lot.

Basic Scenario

A client makes the following purchases:

  • Lot 1: Dec 1, 2010: 200 Shares of ABC for $1,600 total.

  • Lot 2: June 30, 2012: 200 Shares of ABC for $2,000 total.

  • Lot 3: Dec 14, 2012: 200 Shares of ABC for $2,400 total.

On December 15, 2012, the same client makes the following sales and selects Highest Cost as the lot-matching method for ABC:

  • Sale 1: 10:00 AM: 200 Shares of ABC for $1,900 total.

  • Sale 2: 11:00 AM: 100 Shares of ABC for $1,100 total.

Highest Cost

There are three possible matches for Sale 1:

  • Lot 1, which would result in a $300 (long-term) gain.

  • Lot 2, which would result in a $100 (short-term) loss.

  • Lot 3, which would result in a $500 (short-term) loss.

Sale 1 is matched with Lot 3, because that match results in the largest possible loss.

There are two possible matches for Sale 2:

  • Lot 1, which would result in a $300 (long-term) gain.

  • Lot 2, which would result in a $100 (short-term) gain.

Sale 1 is matched with Lot 2, because that match results in the smallest possible gain.

 

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