The stock market has been roiling since tariffs were announced. You may decide this is a good time to reduce your exposure.

Strategy: Specifically identify the shares you want to sell. If you don’t, the IRS will use a default method to determine the taxable gain or loss. This could effectively increase your tax bill for 2025. If you use the specific ID method, you could turn a tax gain into a more beneficial tax loss.

Here’s the whole story: When you sell securities, the taxable capital gain or loss is based on the difference between the net sales price and your tax basis. The “basis” for this purpose is usually the acquisition cost plus certain adjustments such as broker commissions. Also, you must adjust your basis for events like stock splits and mergers. The resulting capital gain or loss is long-term if you’ve held the securities for more than one year. Otherwise, it’s short-term. Currently, the federal tax rate on long-term gains for most taxpayers is 15%, but it’s 20% for high-income investors. Typically, you might own blocks of the same stock or mutual fund that were acquired at different times. For tax purposes, the first-in, first-out (FIFO) method is the default protocol if you don’t sell all your shares. Barring other circumstances, the IRS will rely on the FIFO method to calculate your gain or loss. But you can instead identify the specific shares you’re selling if that will provide a more favorable tax outcome. Example: You acquired 100 shares of Tech Corp. stock in 2021 when the price was $10 per share, 600 shares in 2022 when the price dropped to $5 per share and 300 shares in 2023 when the price bounced to $20 per share. Currently, you own a total of 1,000 shares with an average cost of $10 per share. Now, suppose that Tech Corp. stock is selling at $12 per share after hitting a previous high of $20 per share. If you sell 100 shares of the stock, the IRS will presume that the first shares you bought, with a basis of $10 per share, are the ones you sold. That results in a long-term gain of $200 ($1,200 sales price − $1,000 basis). However, if you specifically identify the 100 shares being sold as coming from the block of shares you acquired in 2023 for $20 per share, you will show a loss of $8 per share ($1,200 sales price − $2,000 basis). The $800 loss can be used to offset other capital gains realized during the year. Note that the tax rules provide some leeway. For instance, if your situation dictates it, you can settle for the $200 taxable gain. Alternatively, if you identify the 100 shares being sold as coming from the 600 shares acquired in 2022 for $5 per share, the gain would be $700 ($1,200 sale price − $500 basis). You might want to opt for a higher taxable gain if you expect 2025 to be a low-income year when you would not have to pay the maximum 20% capital gains rate. Your choices may be a lot easier if you’re holding huge paper losses due to a 2025 downturn in a stock. Generally, the biggest loss will provide the most tax benefit. To use the specific identification method, you must specify those shares to the broker or other agent at the time of the sale. The securities to be sold are identified by the purchase date, the purchase price or both.

Tip: Make sure you receive confirmation of all transactions.