Wells Fargo’s Free Trade offers HIFO
After signing up for Wells Fargo’s PMA package and Wells Trade account, I was pleasantly surprised to discover that the Wells Trade platform offers an alternative and “automatic” HIFO method of designation for tax lot tracking for both stocks and mutual funds instead of the usual FIFO for stocks and averaging method for mutual funds.
To use the new default method of HIFO, you need to sign up for the free Wells Trade’s Portfolio and Tax tracker tools. The following contains additional details which I am quoting from the sign-up agreement.
Highest-in, First-out Method of Designation (“HIFO”)
If a taxpayer holds more than one lot of shares of a particular stock or mutual fund purchased on different dates or at different prices and sells some of those shares without selling all of them in a single transaction it is necessary for income tax purposes to determine which shares were sold. Unless the taxpayer identifies the shares sold in accordance with applicable regulations and rulings or, in the case of a mutual fund, adopts an averaging method, the taxpayer is deemed to have sold the earliest shares purchased (the first-in, first-out, or “FIFO” method), even if a different selection of shares would result in a lower tax. If a taxpayer elects to use an averaging method for a mutual fund, the taxpayer must continue to use that method for that mutual fund all future years. In all other cases, the taxpayer may identify the shares sold at the time of the sale either by a communication to the broker relating to that particular transaction (“specific identification”) or by establishing with the broker that a particular method of identification will apply to all sales except as the taxpayer otherwise notifies the broker.
By using the Tools, I certify to WFI that I intend to establish with WFI that the equity and mutual fund sales in my Account will be identified by a method of identification under which the shares with the highest cost basis are sold first (highest-in, first-out, or “HIFO”) except as to (a) any mutual fund for which I elect (or have previously elected) an averaging method, or (b) any transaction as to which I have used a different specific identification in accordance with applicable income tax regulations.
I understand:
- The HIFO method will apply only to the equities and mutual funds sold through this Account.
- I can override the use of the HIFO method by making a specific designation at the time of a particular sale. This can be accomplished by placing my trade with an agent and informing the agent of the specific designation. HIFO will still apply to all other equity and mutual fund sales (except for mutual funds for which an averaging method applies).
- I can terminate the use of the HIFO method as to all subsequent sales by canceling my use of the Tools and notifying WFI of this intention in writing.
- It is believed that in many cases the HIFO method results in lower tax than the default FIFO method, but this is not true for all taxpayers or for all transactions of a particular taxpayer. In some instances, HIFO will result in higher tax than specific identification or FIFO.
- While the HIFO method is in effect for equities and mutual funds sold through this Account, this method of identification will be binding for federal income tax purposes (except in the case of a mutual fund for which I have elected an averaging method), unless I override HIFO with specific share identification. This is the case even if a different method would produce a more favorable result.
- The Tools will act as if the HIFO method applies to all equity and mutual fund sales, even those to which it does not apply because of specific share identification or the use of an averaging method for a mutual fund. It is my responsibility to deal with any resulting discrepancies.
- In some situations the Tools may fail to determine which shares have the highest cost basis for federal income tax purposes (e.g. due to capital changes or application of certain tax rules). I am responsible for dealing with any resulting discrepancy.
So, there you have it. You can sign up and let Wells Trade default to the more tax-friendly HIFO designation all the time. Personally I have signed up for this service but please be aware that I have not experienced first hand how well it works nor vouch for whether it works at all or not!
Stumble it!
March 4th, 2007 at 6:19 am
What were the specific steps that you had to follow to sign up for the Portfolio and Tax Tracker tools?
March 4th, 2007 at 10:24 am
Hi Dave,
There is nothing special in the signup. In the brokerage tab, click on “Go to Portfolio Analyzer”, then click on “Portfolio Tracker”. The system would prompt you to signup.
Let me know if it works for you.
March 9th, 2007 at 9:50 am
[...] mentioned in a previous post, the brokerage account supports the HIFO method of accounting for tax reporting. The question that [...]
April 26th, 2007 at 8:37 am
[...] tracking and tax reporting information – Wells Trade does provide cost-basis tracking and offers HIFO cost-basis accounting (useful for minimizing taxes) if you elect to do [...]
August 2nd, 2007 at 11:14 am
One thing to be aware of: when determining the shares with the highest cost basis, Wells Fargo includes shares that have bought in the last 30 days and would be a wash sale. This means that HIFO does not do what you want, if you are selling to realize a tax loss and have shares within the wash sale window. In this case, you can call Wells Fargo after you make the trade online (but in the same business day) to specify the tax lot.
August 2nd, 2007 at 12:03 pm
Mike, thanks for your feedback.
Have you tried calling Wells Fargo to specify the tax lot after a trade? Was it easy, i.e. did the CSR know what you are talking about when you call or are they clueless?
August 3rd, 2007 at 3:42 pm
Yes, this happened to me yesterday. I called Wells Fargo and the CSR was very helpful. She took my information, then put me on hold while she relayed the instructions to a trader. Took about 5 minutes. So far I’ve been very impressed with Wells Fargo’s customer service.
The only downside is that the online Tax Tracker assumes that all shares are sold strictly using HIFO. AFAIK there’s no way to adjust this for specific tax lot sales.
August 6th, 2007 at 1:29 am
Well, it turns out I had the wash-sale rule backwards. I thought that selling the older shares would avoid a wash sale. Actually, selling the *newer* shares is required to avoid a wash sale.
When selling older shares, newer shares are considered replacements. However, when selling newer shares using specific identification (i.e. HIFO), older shares are *not* considered replacements. See example 4 on this page: http://www.fairmark.com/capgain/wash/wsreplac.htm.
So, HIFO may be the best option even if you have bought shares in the last 30 days. Just make sure you understand the wash sale rules and how HIFO will impact your sale.