Handling Investment gain and loss

[Jack]

On 2016.05.22 15:04, Mitch Frazier wrote:
> While entering a number of investment transactions recently I  
> realized that
> KMM doesn't actually have a way to record the gain/loss on the sale  
> of an
> investment.  I was thinking about implementing something to solve  
> this but
> wanted to pass the idea past the list first.
> 
> As a first step at a solution, I was going to add a couple more rows  
> to the
> transaction detail in the investment register:
> 
>   - A cost basis field.  This would be an amount field that is
>     used to determine how much the cost of the investment is
>     reduced by the sale.  Initially this field could be pre-filled
>     by the average cost (based on the number of shares being sold).
>     If the entire investment is sold, this field would be fixed
>     and not editable.
> 
>   - A gain/loss field.  This would be an splitable account field
>     for entering the category or categories for the gain/loss.
>     Splits are useful for allowing both short-term and long-term
>     gain/loss specifications on a transaction.
> 
> The current implementation "hides" the gain/loss because the balance  
> of an
> investment shows as zero when the share value is zero, regardless of  
> the
> amount the investment is sold for.  Whereas, since the gain/loss is  
> not
> recorded anywhere, the balance ought to be negative if the investment  
> was
> sold for a gain and positive if sold for a loss.
> 
> Mitch
> 

Unfortunately, I think that may be a bit simplistic.  Once you have  
sold all off an equity, its value is zero, since you don't have any of  
it any more.  When you do sell, the amount of the basis is not income -  
it just gets back what you paid to acquire it.  It is the difference  
between that basis and the sale price which becomes the short or long  
term capital gain or loss.  If you actually buy the shares, that  
purchase price is the cost.  The only reason you would need to be able  
to manually adjust this is if you "add" shares you bought before  
tracking with KMM, or if the shares are swapped for a different equity,  
in which case you "remove" all the original shares and "add" however,  
many shares you get of the new equity.  (In that case, hopefully KMM  
should be able to do the conversion, so you still shouldn't need to do  
it manually.)  The cost basis just transfers from the old to the new.   
I don't see how you get a cost basis by averaging anything.

I'm not certain about how to record the gain/loss, but I know I already  
have category fields for short and long term gain and loss, and two  
sets of each - one for taxable, one for tax deferred.  So far, I only  
use them where the broker designates a dividend (usually for a  
reinvestment transaction) as a capital gain, but I don't see why it  
won't also work for a sale, expect for needing a category to represent  
the recapture of the original payment (cost basis).  I suppose creating  
a category of cost basis would make sense.  When you buy, that's where  
the purchase price goes.  When you sell, the cost basis category is  
reduced by the same, with the appropriate capital gains category  
getting the difference from the actual sale price.

One complication is that if you acquire an equity through multiple  
purchases, at different share prices, then when you sell, you do need  
to designate which of those lots you are selling.  While it generally  
is taken that the oldest gets sold first, you may be allowed to  
designate which.  That would mean that not only the total value of the  
cost basis needs to be tracked, but number and price of shares for each  
purchase.

I do agree it would be great for KMM to be able to track this, as it  
would allow tracking unrealized gain/loss instead of just current  
value.  I'm just not sure how much change would be needed in the core  
data structures.  However, it's certainly worth discussing, and I don't  
think any developer will have time to address it until after the  
conversion to KDE Frameworks is complete, and there is not yet any  
definite timeline for that.

Jack