| First In First Out Method |
The First In First Out method is
referred to as FIFO. It is a straight-
forward concept--the first shares
you bought are always the first
shares you sell. The IRS likes this
method because in a generally rising
stock market, it maximizes the capital
gain tax that they will collect.
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Absent any action on your part, this is the method that brokerage firms will apply
when you sell a stock that has multiple tax lots. (It applies to bonds, too, but usually
the difference in cost between bond tax lots is minor, unlike stocks which can vary
substantially over time.)
To take control of your own tax destiny, we highly recommend that you use the
Specific Identification method instead. You don't want to pay capital gains tax on the
shares that your Aunt Mabel gave you back in 1960 (with a carryover basis of $1.00
per share) when you have reinvested dividends for years and now find that you need to
sell a little bit. Why pay capital gains tax on decades of inflation when with a little
effort you can minimize your tax by specifically identifying your recent dividend
reinvestment shares as the ones you are selling?
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