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FIFO Rule Excluded from Final Version of the Tax Bill

The rule “would have been another regulatory headache dropped on the industry,” say financial advisors.

To the relief of many in the financial services industry, including financial advisors, the FIFO rule was excluded from the final version of the hotly contested tax reform bill delivered Friday evening. The bill, as it is now written, is expected to be voted on this week and signed by President Trump before Christmas.

The “first-in, first-out” provision, requiring investors with taxable accounts who bought shares in a company over time to sell their longest held stock first, which potentially triggers a higher tax on earnings, was initially part of the Senate’s tax reform bill passed Dec. 2. It’s a small part of the 560-page bill that, if signed into law as expected, will bring about the most significant changes to the U.S. tax system in decades.

Still, the FIFO rule caught the attention of politicians and wealth managers while the final bill was under consideration.

Shortly after the provision was discovered in the Senate bill, a group of about 40 House Republicans sent a letter to congressional leaders strongly objecting its inclusion.

The letter argued the rule could impact middle-income retirees and add complexity for long-term investors as well as take away from the benefit of new technologies—namely automated advice platforms or robo-advisors—that have automated tax loss harvesting.

“A switch to mandatory FIFO could deter an average investor’s use of these platforms and significantly limit their access to more sophisticated wealth management advice,” the letter states. “Millions of ordinary retail investors have access to these services today.”

Joe Ziemer, the vice president of policy and communications at Betterment, was in Washington, D.C. this month speaking with lawmakers about the provision. In a white paper, the robo-advisor estimates that between 2000 and 2013, tax loss harvesting would have added 77 basis points to a typical customer’s after-tax returns.

Ziemer said excluding the FIFO rule was a “win for investors” and that it would have “brought another level of complexity to investing.”

Automated investment services weren’t the only ones happy to learn the rule was tossed. Registered investment advisors also praised the decision.

The exclusion means their clients maintain flexibility in choosing which shares they want to sell, an “important tool in managing tax obligations,” said Phil Shaffer, the founder of Halite Partners.

Peter Schiff, the CEO of Euro Pacific Capital, an RIA and broker/dealer, with five offices across the U.S., was happy to see the rule go. “Inclusion of the FIFO restrictions just would have been another regulatory headache dropped on the industry,” he said.

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