The Senate wants to take away investor choice when it comes to deciding which shares to sell when offloading stock.

Lawmakers have included a provision in the Senate tax reform bill that would require investors to use the FIFO (first-in-first-out) method when selling stock. In the current rising market, forcing investors to sell their oldest shares first would mean forcing the recognition of larger gains at tax time.

Mutual fund investors would still be able to use the average cost of shares when they sell fund shares.

“As advisors, a FIFO tax would give us a bit more bias toward mutual funds rather than individual securities because our only option with individual securities would be first-in, first-out recognition of gains,” says Tim Steffen, director of advanced planning at Baird Private Wealth Management. “With mutual funds, we’d still have the average cost basis option.”

The impact on charitable donations and gifting of stock would also be affected by the Senate FIFO tax provision.

The thing that I think some people might not catch is that this doesn’t just apply to the sale of stock, but to any stock disposition, including charitable donations and family gifting,” Steffen says. “In the past, the typical strategy would be to give away stock with the lowest cost basis. You may not have that flexibility anymore.”

The Senate version of the tax bill would eliminate the specific identification tax method that currently allows investors to sell stock shares purchased on a particular date.

The provision would create an additional $2.7 billion in taxes over the next 10 years, according to a report from the Joint Committee on Taxation. The FIFO requirement is not in the House version of the tax bill, so the lack of uniformity would need to be addressed in conference.

“I’d give this a 50-50 chance of passing,” says Steven Rosenthal, a tax policy analyst at the Urban-Brookings Tax Policy Center. “In my view, it’s a good idea, not because of tax revenues but because it would simplify the tax code. Fewer choices are better and would benefit the system.”

On the downside, he says, FIFO will be costlier to investors in a rising market like the one the stock market has been experiencing.

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