A Dodged Bullet with the New Republican Tax Plan

Cheri Franklin |

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As of today (12/16/2017), the passage of the reconciled version of the Republican tax bill appears to be a foregone conclusion. As you may be aware, the Senate version included a provision making first-in-first-out (FIFO) the only allowable method for calculating capital gains on the sale of investments such as stocks, ETFs, and mutual funds. Thankfully, the reconciled version has eliminated that provision, as discussed in this CNBC article. The author also verified this by reading the actual text of the bill, so you don’t have to.

To clarify, the mandatory use of FIFO could have significantly increased the tax consequences of selling part of a position, a commonplace occurrence when raising needed cash or rebalancing. Instead, investors will still be able to designate specific lots when they sell. As far as we know, all the major brokerage firms offer the option to automatically designate the most tax-efficient lots, and at Clarity, we choose this option for our clients who have taxable accounts. If (or when) we see another major market downturn, this option could be useful for tax-loss harvesting.

Unsurprisingly, many important players in the financial services industry lobbied strongly against mandatory FIFO, as seen in the second video of the same CNBC article linked above. In this case, their interests were aligned with their investors. At Clarity, we are pleased with this outcome, as the opposite could have resulted in chaotic, highly-pressured trading before year-end, and it would have made it more difficult for retirees to raise cash from their portfolios.