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.