When you sell part of a position in a taxable brokerage account, the broker must decide which purchase lots left the account. That choice, FIFO, LIFO, highest cost, lowest cost, average cost (common for mutual funds), or specific identification: changes your reported gain or loss on Form 1099-B and Form 8949. Set the method before you click sell when you care which dollars leave.
Where lots live: Taxable brokerage account basics. Basis corrections: 1099-B basis adjustment basics. Harvesting context: Tax-loss harvesting basics. Filing orientation: Filing taxes for beginners.
Common lot methods (orientation)
| Method | What it usually sells first | When people use it |
|---|---|---|
| FIFO (first in, first out) | Oldest lots | Broker default for many stocks/ETFs; can force long-held low-basis lots out |
| LIFO (last in, first out) | Newest lots | Sometimes useful if recent lots have higher basis (less gain) |
| Highest cost / tax-efficient | Lots with highest cost basis | Often used to minimize current gain or maximize current loss |
| Lowest cost | Lots with lowest cost basis | Can maximize current gain (sometimes intentional) |
| Specific identification | Exact lots you name in the trade ticket | Fine control for harvests and holding-period planning |
| Average cost | Blended basis across shares | Default for many mutual funds and some DRIP-heavy funds. See Average-cost basis for mutual funds |
Holding period (short-term vs long-term) still rides with the lot sold, not with “the ticker as a whole.” Capital-gains framing: Capital gains basics.
Specific ID vs hoping the default is fine
- Open the trade ticket’s cost-basis / lot relief panel at Fidelity, Charles Schwab, Vanguard Brokerage, E*TRADE, or your custodian before you submit.
- Prefer specific identification when you are harvesting a loss, avoiding a wash-sale adjacent lot, or protecting a long-term lot with huge embedded gain.
- Confirm the confirmation PDF lists the lots you intended; if it shows FIFO and you wanted specific ID, call the broker the same day, post-trade fixes are harder.
- For mutual funds on average cost, switching methods has IRS timing rules. Do not assume you can flip mid-year without reading the fund/broker rules and current IRS Pub 550 cues.
DRIP purchases create many small lots; tracking them matters when you sell a slice: DRIP cost basis basics.
Worked example: FIFO vs specific ID on the same sale
Sam holds 300 shares of ETF ABC in a Schwab taxable account:
| Lot | Shares | Purchase date | Cost/share | Unrealized |
|---|---|---|---|---|
| A | 100 | Jan 2020 | $40 | Large long-term gain |
| B | 100 | Jun 2024 | $95 | Small short-term gain |
| C | 100 | Jan 2025 | $110 | Short-term loss of $10/share at a $100 sale |
Sam sells 100 shares at $100.
- Under FIFO, Schwab sells Lot A: roughly $6,000 long-term gain ($100 − $40) × 100.
- Under specific ID of Lot C, Sam books roughly $1,000 short-term loss, and keeps the low-basis Lot A intact for later planning (estate step-up, charitable gift, or a calmer year).
Same ticker, same proceeds, very different Form 8949. Sam screenshots the lot selection and keeps it with the 1099-B.
Habits that prevent surprise 1099-B lines
- Set a default lot method you understand; override per trade when harvesting.
- Export the open-lot report quarterly, especially after transfers (ACATS) and corporate actions.
- Coordinate household accounts before a harvest so you do not recreate a wash sale (Tax-loss harvesting basics).
- Do not invent basis on noncovered lots; reconstruct confirms first (1099-B basis adjustments).
- Remember IRAs and 401(k)s generally do not need lot ID for annual capital-gain reporting the way taxable accounts do.
Named custodians (Fidelity, Schwab, Vanguard, E*TRADE, Merrill Edge) publish lot-relief help articles; their UI labels change, trust the trade confirmation and year-end 1099-B.
Checklist
- Know your broker’s default lot method for stocks/ETFs vs mutual funds.
- Use specific ID when the tax dollars matter; verify the confirmation.
- Match holding periods to the lots you actually sold.
- Keep lot exports with your tax folder for Form 8949.
- Read mutual-fund average-cost rules before you switch methods.
- File with Filing taxes for beginners habits: reconcile 1099-B to your lot list.
After a split, confirm post-split lot counts before you specific-ID a sale: Stock split cost basis basics.
Educational only. Not tax, investment, or accounting advice. Lot-identification and basis rules are technical; confirm with IRS publications, your custodian’s cost-basis tools, and a qualified tax professional.