I’ve had a Fidelity brokerage account for a long time. I’ve been relatively happy, with only two complaints:
–The first is a “just me” concern. The Hong Kong stocks I own are always mispriced, except during Hong Kong trading hours. Other than when that market is live, prices are typically two days old.
I’ve discussed this numerous times with Fidelity representatives (who probably think: “Oh, him again!”); I’ve also mentioned this in many surveys I’ve filled out over the years. Apparently, it isn’t important enough to fix. Every once in a while a Fidelity trader will advise me to trade these shares on the OTC market in the US, where they will be priced in my account, if accurate quotes are so important. I don’t see the advantage for me, since my experience is that in times of stress US volumes for stocks like these evaporates. In such circumstances, my observation is that prices can easily be 5% -10% less favorable in the US than in Hong Kong. They’re also cheaper to trade in Hong Kong, too, but that’s a lesser issue.
–The second is more serious. For some years, brokers have been required to report gains an losses from trading in taxable accounts to the IRS. Determining selling price is straightforward. The default option Fidelity uses for the cost of the shares sold, however, is the average price paid for all the shares in the position.
This is apparently the easiest thing for Fidelity to deliver. But it’s not always the best for the client. And the layout of the Fidelity online trade ticket doesn’t really highlight this important issue. Unless you click on the expanded ticket link at the bottom of the form, you won’t be able to specify the tax lots that will be sold.
What is this about?
–gains from stocks held for a year or less are taxed as ordinary income; gains on stocks held longer than that are taxed at the (lower) long-term gains rate (more information from Turbotax). So all other things being equal, it’s better to recognize a long-term gain than a short-term one.
–I generally try to sell my highest-cost shares first. This results in recognizing the largest loss or smallest gain. A net loss can have a tax value (see the Turbotax link above); subject to the holding period rules, the smallest gain should also mean the smallest income tax payment.
Suppose I hold 100 shares of JPM that I’ve bought at $50 and another 100 at $80. Both lots are short-term.
I decide to sell 100 shares and net $9000 for them.
If at the time of sale I specify the shares with the $80 cost, my taxable gain is $1000.
If I specify the $50 shares, my gain is $4000. (I would probably only do this if I expected to offset this gain with a loss from other stock sales or from losses carried forward from prior years.)
If I let the Fidelity computer do the work, my capital gain is $2500.
If I’m in the 25% tax bracket, my income tax on the sale will be $250, $625 or $1000–depending on how I handle my cost basis.
Yes, I’ll likely sell the remainder of the position eventually, so I’m only postponing tax by choosing the highest cost shares. Even so, in the meantime I have more money to put back to work today if I minimize current taxes.