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FIFO or LIFO -- tax consequences


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I had this debate with my friend.

 

Let's say that you bought 200 share of AIG at $50 1 year ago, and then bough another 200 at $60 3 weeks ago. Then to maximize your return, you sold 2 Nov 27 $63 calls. Now you share will be called away. Do you do FIFO which implies that you'll pay longer gain tax, or do you do LIFO which you'll pay short term gain.

 

I argued for LIFO, because you end up paying less tax in dollar amount; He said FIFO is better because you pay less tax in terms of percentage. I argued that unless one is to keep the $60 buy for another year, one should do LIFO.

 

FIFO: (63-50) * 200 = $2600 gain at 30%, which is $780 tax bill

LIFO: (63-60) * 200 = $600 gain at 50%, which is $300 tax bill.

 

WDYT?

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How much longer do you expect to hold AIG and what is your estimate of IV?

 

Their IV is somewhere between $70 -- $80, so right now it's cheap, but not very cheap. Hence, I'm not sure about holding period, because if it reaches closer to $70+ quickly, then one should sell and move on, as insurance is a boring business and AIG hasn't shown consistency in underwriting profitability.

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