When you sell stocks, mutual funds, or ETFs, your cost basis selection, the method you use to track which shares you sold and at what price. Also known as tax lot selection, it directly controls how much capital gains tax you owe. It’s not just paperwork—it’s a real way to lower your tax bill, especially if you’ve held investments for years and bought shares at different prices.
Most brokers default to FIFO, First In, First Out, which means you sell your oldest shares first. That might sound fair, but if those shares were bought decades ago, you could end up paying way more in taxes than needed. Instead, you can switch to specific identification, choosing exactly which shares to sell—like the ones bought last year at a higher price to minimize gains, or the ones with the biggest loss to offset other income. This method gives you control, but you have to be deliberate. You can’t just pick randomly after the trade; you must instruct your broker before the sale closes.
Some investors use LIFO, Last In, First Out to manage short-term gains, especially in volatile markets. It’s less common than specific identification, but it’s allowed under IRS rules if your broker supports it. The key is matching your method to your goals: Are you trying to reduce taxes this year? Balance gains and losses over time? Avoid triggering the net investment income tax? Your choice affects your annual tax return and your long-term wealth.
What you’ll find below are real examples from investors who used cost basis selection to save hundreds—or even thousands—of dollars. You’ll see how people with mixed portfolios, dividend reinvestments, and multiple purchase dates made smarter choices. Some used broker tools. Others tracked everything manually. None of them got lucky—they just understood how the system works and used it wisely. Whether you’re new to investing or have held positions for years, the right cost basis method can make your portfolio more efficient. Let’s look at what works.
Learn how Specific ID vs FIFO tax lot management for ETFs can save you thousands in capital gains taxes. Know which shares to sell, when, and how to use your brokerage's tools to keep more of your money.
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