Under current law, taxpayers who hold multiple lots of the same shares can identify which shares are considered sold for purposes of calculating capital gains. Section 13533 of the Senate tax bill would eliminate this flexibility and mandate a first-in, first out (FIFO) approach.

This will adversely impact employees who have acquired low cost basis company shares in the past and continue to hold those shares.

  • The obvious – Following enactment, employees will want to review/confirm their history of share purchases and determine their cost basis in each lot of company shares, so that they can more precisely estimate the capital gains that will be recognized in any future sale or disposition.
  • The not so obvious – Following enactment, any market sale related to an equity award (exercise of a stock option and sell-to-cover for withholding) is likely to be considered a sale to which this FIFO approach applies. The current wording of the provision suggests it may be difficult for Treasury to mitigate the impact of this rule through exceptions in subsequent Regulations.

At this point, there is no real fix to this proposed rule change. This is an employee issue. However, if the tax bill is enacted with this provision intact, companies may want to review their communication practices regarding tax changes which impact their employees’ participation in share plans.