Note: As discussed in the comments, this rule was – thankfully – eliminated from the next revision to the bill. No need to share this post as evidence in your next Facebook battle! Also, we Vigilantes take full credit for changing Congress’s mind on this important issue!

Vigilantes unite! There could be a hefty new burden quietly added to your taxable investments, if the United States Senate has its way!

You’ve all heard of the tax bill currently weaving its way through Congress quickly by virtue of being well-lubricated by all the grease and slime therein. Specifically, I’m referring to the Tax Cuts and Jobs Act – so named because, as we all know, the things named in the title of an act happen 100% of the time, without fail.1 But you’ve probably heard about it only in the context of whether or not it will result in the wealthiest among us being unfairly rewarded for a massive conspiracy or result in a magical trickle-down effect. Spoiler alert: If approved, it will reduce taxes slightly on the wealthiest among us, but they will still pay way higher rates than the poorest among us, and will still pay vastly higher percentages of the overall tax burden2 than anyone else:


Changes to tax law make sense only in context.

But let’s look beyond that clickbait-generating, artificial “class warfare” timebomb. There are plenty of other posts out there to tell you how to feel about that issue, one way or the other, because advertisers pay for eyeballs and the best way to get eyeballs on your site is to generate anger.

Instead, I want to focus on what you’ve missed about the Tax Cuts and Jobs Act. The quieter change that will affect anyone who invests after-tax money in stocks, bonds, limited partnerships, and an incredibly long list of other things considered “securities” under state and/or federal laws.3

The FIFO Restriction4

As you may recall from my post on Closing the Backdoor, I tend to express a teensy bit of skepticism of any proposed government action. So when I saw that, buried deep within then Tax Cuts and Jobs Act at Section 13533, there was a surprisingly brief proposal to limit the determination of cost basis to the “first-in first-out” method, I immediately thought “Wow, what a beautiful mechanism to sleazily create additional tax revenue without the ire of 99% of the public! Politicians are artists, too!”

The FIFO Restriction would force you to sell your oldest shares of any security before selling newer shares that are the same or, more likely, “substantially identical” as defined by the IRS.5 This is the method which, if you have been lucky enough to experience investment gains, always results in the highest capital gains tax burden upon sale: the oldest shares will have appreciated by a greater amount than the newer shares of the same thing.

Imagine you’ve been purchasing VTSAX in a taxable account in the amount of $1,000 per month for 20 years. Like clockwork, you’ve seen growth of 10% annually. The shares you purchased for $1,000 in Month 1 of Year 1 are now worth $7,328.07. Since your basis would be your purchase price of $1,000, you’d have capital gains of $6,328.07 on the sale of these shares. The shares you purchased in Month 1 of Year 20 are now worth $1,100, for capital gains of $100 upon sale. Let’s say you’re on a lean FIRE path and usually pay a 0% rate on capital gains, but you did some extra work in Year 20 and owe 15% on capital gains. Clearly, if you’re looking for some cash at the end of Year 20, you’d prefer to sell the shares with the $100 capital gains and incur a tax burden of $15 rather than sell your oldest shares and incur a tax burden of $949.21 to gain access to the same amount of money.

The Tax Cuts and Jobs Act wants to make you pay $934.21 more to get your own money. It will force you to sell a particular piece of your own property, rather than another piece of your own property.


Oh my stars, this offends my delicate Vigilante sensibilities!

Thus, those of us who buy and hold over decades in an effort to tame the Hulk will be forced to sell securities that we’ve had for 20 years, hopefully growing all that time, rather than being able to choose to sell a newer share for a lower tax burden if we need to that particular year. We’ll need bigger and bigger gains to make up for money lost to taxes. We’re removing choice from the equation, and replacing it more and more with chance.

Are they allowed to do this?!

The good news is that the answer to this question might genuinely be no!

Property rights are one of the primary, foundational ideas behind modern limited government. Ownership of property typically implies several kinds of rights, including but certainly not limited to the right to possess the property, to use it, or to dispose of it as the owner sees fit. Just like we have the right to dispose of our real estate or our collection of I, Vigilante dolls as we please, we have some kind of property right to each security we own. This, hopefully, includes the right to alienation (transfer, disposition, sale…take your pick) of those securities. This right isn’t unconditional – you can’t sell your alcohol to a minor – but it is typically pretty damn broad.

So, there might be a Constitutional barrier to enforcement of these rules…if anyone presents a serious challenge to its enforcement. To this Vigilante, there seems to be no justification whatsoever for taking basic property rights out of the hands of the owners of securities, other than “this is the best way to quietly generate oodles of tax revenue.” The idea is absurd: Why should someone else be able to tell you to sell your I, Vigilante Black Bandana Doll before selling your I, Vigilante Green Bandana Special Edition Doll? They’re your dolls, damnit!6

And as bad as that sounds, there are still more problems! (And practical ones rather than theoretical legal ones, at that!)

How would the FIFO Restriction be enforced?

As I said, this is a very brief section of the Act, accounting for only about 2 of the 515 pages. Unfortunately, brevity is often bought at the cost of clarity in legal writing. It is unclear from the current proposal whether this restriction would apply within any one account or would be mandated across all accounts owned by a taxpayer.

If the restriction is not mandated across all accounts, there is an easy workaround: Open another account with your broker, transfer the oldest shares over, and profit! Your “new” shares are now the oldest in your original account, and thus available for immediate sale without breaking the FIFO Restriction. Roboadvisors would probably do this for you automatically, because robots hate the IRS.


Let’s just assume this lovely public domain image has an auditor sitting on that park bench, shall we?

I suspect, then, that the IRS will issue a regulation mandating the FIFO Restriction across all accounts held by a taxpayer, which causes an enforcement problem: Is it the responsibility of the broker or the taxpayer to determine whether the taxpayer has the same or “substantially identical” securities in another account which must be sold before selling any particular security?

If it’s the broker’s job, it will cause a logistical nightmare that will probably cause brokers to raise our recently-decreasing fees to compensate: Brokers would need to figure out a new way to report data to one another seamlessly despite different recording techniques, to guess at the ever-elusive “substantially identical” definition, and to add a shitton of additional background work to each transaction that occurs so that they can be confident that the sale is permitted under the FIFO Restriction. And what if one broker is willing to use a more lenient definition of “substantially identical” than another? Will we be choosing brokers in part based on how fast and loose they play with the law?

If it’s the taxpayer’s job, we’re all in for a treat. Extended returns, first of all, with a brand new massively difficult form to audit. More importantly, as a divorce attorney, I have found that a shockingly large number of people do not even know what accounts they own or what securities they own within those accounts. To most average Americans, the employer offers a mysterious benefit called “my retirement,” and often that term includes an implicit reference to Social Security. Yikes.

Even if we assume, contrary to my experience, that every taxpayer keeps meticulous records and is literate in investing terminology, we have a giant problem of vagueness: Experienced attorneys who work in securities law every day for decades struggle with the “substantially identical” definition, so what hope do the rest of us have? Opportunities for audits will skyrocket, and we risk the cost of enforcement eating up any additional revenue the FIFO Restriction generates, anyway! (A remarkably common story for new government regulations, if you believe Milton and Rose Friedman’s Free to Choose – which I wholeheartedly do!)

The sale of securities has been very heavily regulated for the better part of a century, and you’ve quite possibly broken some of those regulations by accident. The Tax Cuts and Jobs Act, it seems, seeks to expand your opportunities to break regulations and incur debt to the IRS. Let’s spread the word!

  1. I promise the sarcastic tone of this post will be at least minimally palatable.
  2. See: CATO Institute
  3. Keep in mind, this would not affect your tax burden on investments in tax-advantaged accounts like your IRA, which are exempt from capital gains tax.
  4. This intentionally sounds like the title of an episode of the Big Bang Theory, in a nod to the unnecessary complexity of our tax laws in an effort to amaze and confuse the public.
  5. A notoriously poor, vague definition that can result in accidental violations of the “wash sale” rule.
  6. Please note in the comments if you’d be interested in purchasing I, Vigilante dolls. I hear they are expected to appreciate in value like Beanie Babies…i.e. not at all.

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