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Speaking Mathanese: Selling Stock

Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs the computations that make the biggest difference to your bottom line.

This week, our quest to make you smarter than a fifth-grader has us eradicating your investment losses while helping you to strategically sell stock.

The myth
Let's begin with a reader question:

I buy 10 shares of a stock. Six months later I buy 10 more shares. Eight months later I sell 10 shares. Would that be taxed as long term, short term, or half and half? In other words: Does Uncle Sam use first-in, first-out (FIFO)?

Good question, but we actually need to dig a little deeper. How about we assume that our dear Fool is one of those who bought Crocs (Nasdaq: CROX  ) at its IPO? Here's what he would have, according to the example above:

Transaction history

Cost

Feb. 8, 2006, bought 10 shares

($285.50)

Aug. 8, 2006, bought 10 shares

($254.00)

Apr. 9, 2007, sold 10 shares

$513.90

Two things should strike you. First, this Fool is either wicked smart or unbelievably lucky. Second, the rules of tax-loss selling don't apply here. We'll be figuring capital gains instead.

The math
How much, though, is mostly up to the seller. Here's our resident accountant, Roy Lewis, to explain:

... The "default" method is FIFO. In this example, the sale would be long term. There is NEVER any "blended" sale (i.e., half long term, half short term). 

But there's a wrinkle here. Brokers will usually allow you to specify which lots you'd like to sell. So, even though Uncle Sam would prefer that our Fool sell the Crocs position he opened on Feb. 8, he could order his broker to sell the shares he bought on Aug. 8.

Nevertheless, our Fool has relied on the good graces of the IRS. Here's what that does to the Mathanese:

$513.90 (total sale value) - $285.50 (cost basis)

That's $228.40 in capital gains, which, earned over 14 months, would be classified as a long-term gain to be taxed at a maximum rate of 15%. Pretty sweet, eh?

Questions? Submit them here, and see you back here next week for more Mathanese.

For more money ideas, get 30 days of free access to Motley Fool Green Light right now. There's no obligation to subscribe.

Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning Mathanese.


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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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