Specific Lot Identification

If you are an executive working at a publicly traded company managing your own stock-based compensation plan, specific lot identification 'SLI' is a term you should be aware of. If you're not, it could be causing a premature tax bill.

We recently onboarded a new client who had different 'lots' of the same stock in their brokerage account, as it vested quarterly over many years at different price points. When they previously sold stock, the broker was simply selling the oldest lots of stock in the account (also known as FIFO. This is typically the default setup).

SLI allows discretion around exactly what lots of stock to sell. For example, if lot #1 of stock vested at $20/share, and is now trading at $50/share, there would be a $30/share capital gain. But lot #2 may have vested at $45/share, resulting in only a $5/share capital gain.

Lot #1 could be sold at a more favorable time. Perhaps during a year where income is lower and you're looking to intentionally create more capital gains. Or when the stock is trading at a lower price, resulting in a lower capital gain tax. Or maybe it allows for a short-term gain convert to a long-term gain at a more favorable rate before it's sold. Bottom line, it's a tool worth utilizing.

Sometimes, paying capital gains tax is necessary. And it's often an amazing concession when you're selling a stock that's performed well. But we all too often see Schedule D far more generous than it needed to be. It's not what you make, it's what you keep.

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^{Neither Voya Financial Advisors nor its representatives offer tax or legal advice.  Please consult with your tax and legal advisors regarding your individual situation.}