Tax lots are documents that relate to any and all transactions that have to do with the investment portfolio. The tax lot will detail the terms of each transaction that involves each security in the portfolio, and identify the tax implications associated with teach line item in the lot. This record of tax purchases can come in very handy when it is time to calculate and pay taxes for a given period.
Along with forming the basis for tax lot accounting, the process also provides a point of reference for creating investment strategies. Because a tax lot will include the taxable purchase date for each transaction, it is possible to determine which shares in the portfolio to sell at some point in the future and thus realize the maximum amount of tax advantage.
Along with the taxable purchase date, the typical tax lot will include the proposed date of sale, the cost basis associated with the security, and the transaction size that is involved with the proposed sale. In addition to these important details, a tax lot also can include a strategy for splitting or merging record lots in order to create the best tax situation possible. This is particularly true when the assets included in the financial portfolio include investments in property.
Maintaining the tax lot also helps to create a quick snapshot of the portfolio. The snapshot simplifies the task of evaluating the current worth of all assets in hand, including those that may be scheduled for sale later. As the market shifts, the tax lot can be adjusted to meet new projections, and thus continue to help the investor work toward the best tax advantage possible.
Accountants can help prepare a tax lot for investors that are unsure how to go about the process. Brokerages also can provide a tax lot for clients, when all relevant investments are listed with the same brokerage house. In addition, software packages designed to assist investors with planning investment strategies often include templates to help prepare a tax lot.