What Is Tax-Lot Accounting?
In plain English
Tax-lot accounting is a record-keeping method that tracks the cost basis, purchase date, and quantity of each individual purchase (lot) of a security. When you sell shares, choosing which specific lot to sell can significantly affect your capital gains tax liability.
Why Does Tax-Lot Selection Matter?
If you bought the same stock on multiple dates at different prices, each purchase is a separate tax lot. Selling a high-cost lot produces a smaller gain (or larger loss), reducing your tax bill. Selling a lot held over one year qualifies for lower long-term capital gains rates versus short-term ordinary income rates.
What Are Common Tax-Lot Methods?
The default is FIFO (first in, first out), selling oldest shares first. Other methods include LIFO (last in, first out), highest cost, and specific identification, where you choose exact lots. Specific identification gives the most control and is the preferred method for tax-loss harvesting.
How Do You Implement Tax-Lot Accounting?
Most brokerages track tax lots automatically and let you select lots at the time of sale. You can set a default method in your account settings. For maximum tax efficiency, review your lots before selling and consider the holding period and cost basis of each lot.
Frequently asked questions
Does tax-lot accounting apply to mutual funds and ETFs?
Yes. Every purchase of a mutual fund or ETF creates a separate tax lot. This is especially relevant for investors who make regular contributions through dollar-cost averaging, as each contribution has a different cost basis.
What happens to tax lots when you transfer brokerages?
Cost basis information typically transfers with your account during an ACATS transfer. However, verify with both brokerages that lot-level detail — including purchase dates and cost basis — transferred correctly to avoid tax reporting errors.
Keep exploring
Related terms
Capital Gains
Capital gains are the profits you earn when you sell an investment for more than you paid for it. Whether those gains are short-term or long-term determines how much tax you owe.
Tax-Loss Harvesting
Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains and reduce your tax bill. It is a key strategy in taxable investment accounts.
Dollar-Cost Averaging
Dollar-cost averaging means investing a fixed dollar amount at regular intervals regardless of market conditions. This strategy reduces the impact of volatility on your overall purchase price.
Brokerage Account
A brokerage account is a taxable investment account opened with a brokerage firm that lets you buy and sell stocks, bonds, ETFs, and other securities.