Cost Average using LIFO

TradeGrub

Last Update vor 2 Jahren

Default tax lot selection is FIFO for most brokers. This means that the initial position bought for a stock will be the first one that will be sold during the sell transaction.

However, it is not the best selection for swing and long-term accounts for reasons shared below.

For example, if you bought 10 stocks for $100 each and then bought another 20 stocks at $90. Your cost average is (10*100)+(20*90)=(2,800/30)=93.33. If you sell 10 stocks when the price is at $95, then it should result in profit but that is not always the case due to tax lot default selection as explained below:


Default FIFO:

If you sell 10 stocks when the price is at $95, then FIFO will select the stocks bought first at $100 and sell them at the loss of $5/stock.

The loss could affect your future buys and cost basis for the same stock due to the wash sale rule as well.


LIFO:

If you sell 10 stocks at $95 using LIFO, then it is a $5/stock profit. Your initial position is still intact but due to the $50 profit, it would adjust your cost basis overnight and reduce it based on profit. If you take multiple profits along the way using LIFO, then it would keep reducing your initial position cost basis.


Updating Lot selection post-sell transaction:

You have an option to also update and choose a specific lot after the sell until the transaction is settled (2 days).

You can go to your broker cost basis option on your account and look for unsettled transactions and it would allow you to pick and choose a specific purchased lot to be used for a sell transaction. Your cost basis would get updated overnight once you update the lot selection at the end of the day (typically 10 pm onwards) after the sell transaction and before it is settled (within 2 days). You can also reach out to broker customer service and they can help and update it on your behalf.

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