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  1. Two years ago, I bought 100 shares of XYZ.

  2. Yesterday, I bought another 100 shares of XYZ.

  3. Today, I sold 100 shares of XYZ.

  4. Which 100 shares did I actually sell? If it were the 100 shares from 2 years ago, then that contributes to my long term capital gains tax. If it were the 100 shares from yesterday, then that contributes to my short term capital gains tax.

Bob Baerker
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Bear Bile Farming is Torture
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1 Answers1

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At the time of the sale, you can designate what shares you want sold. The IRS requires that your broker verifies that those specific shares were sold. The IRS calls this "specific share identification." Without that confirmation, the IRS will default to FIFO (First In, First Out).

Bob Baerker
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    FIFO means that the first 100 shares I bought are sold, right? just to be sure. – Bear Bile Farming is Torture Jan 02 '21 at 18:20
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    That is correct. – Bob Baerker Jan 02 '21 at 18:28
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    Interesting - can I ask why this is ever relevant? Naïvely, a share is a share is a share - a representation of a proportion of the ownership of a company, and two shares of the same type are identical. I would guess that there are tax implications though? And if there are different types of shares, those are obviously different! – Neil Tarrant Jan 03 '21 at 11:46
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    @NeilTarrant point #4 in the original question addresses that: whether it is considered "short term capital gains" or "long term capital gains" can make the taxes different. – Moshe Katz Jan 03 '21 at 12:49
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    @Neil Tarrant - Yes, this is all about tax implications. Lot designation for selling shares (or covering short positions) gives you the opportunity to determine the size of the gain or loss that you want to realize. – Bob Baerker Jan 03 '21 at 13:19
  • If your ordinary income tax rate is higher than the long-term capital gains tax rate, is there ever any reason not to use FIFO? Conversely, if your ordinary income tax rate is lower than the long-term capital gains tax rate, is there ever any reason not to use LIFO? Is there every any situation where it makes a difference if you bought all the company's stock in the past year, or all of it more than a year ago? – tparker Jan 03 '21 at 15:20
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    You buy or sell the position(s) that give you the desired gain or loss that enables you to reduce taxes. If harvesting losses, make sure that you don't trigger a carryover wash sale violation. – Bob Baerker Jan 03 '21 at 15:43
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    @tparker It's almost always advantageous (taxwise) to sell long-term shares. But if the price of the stock had been rising, you would usually want to sell the youngest long-term shares, not the oldest, because they'll have the least gain. Of course, you may just be postponing the big tax hit -- eventually you may need to sell the oldest shares. – Barmar Jan 03 '21 at 16:26
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    @Barmar Got it. While I admit that this is a pretty unusual situation, it looks like if your income is in the range of $40,000-$40,125 (if single) or $80,000-$80,250 (if married filing jointly), then the ordinary income marginal tax rate is only 12% and the long-term capital gains tax rate is 15%, so you pay lower taxes on short-term capital gains (taxed as ordinary income) than on long-term capital gains, and (at least in the short run) you're better off selling your short-term shares. – tparker Jan 03 '21 at 17:19
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    @tparker True. I generally don't think low-income people are likely to be significant investors, but it can happen when you retire and your income drops. – Barmar Jan 04 '21 at 00:30
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    Say you bought 1,000 shares of Amazon 20 years ago for $20 a share, now worth $3 million, and are holding it for the long term. Then last month you invested another $3 million buying 1,000 more shares and the price has been stable so you could sell for the same price. If you needed to sell stocks to get $3 million for some reason, the default FIFO would have you selling the shares from 20 years ago and paying $450,000 long term capital gains, but selling the younger shares would result in no taxes because the price was the same. – Jason Goemaat Jan 04 '21 at 14:25