Choosing Which Shares You Sell
When you sell part of a position bought at different times and prices, you can choose which shares you are selling. If you do not choose, the default is first-in, first-out, which usually means the oldest, cheapest shares and the largest gain. Naming the highest-cost lots can cut the reported gain on the same sale by tens of thousands of dollars.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Investors who bought the same stock or fund in several purchases over time
- Employees with company shares from RSUs, ESPP purchases, and option exercises at different prices
- High earners trimming a concentrated position who want to control the gain each year
- Investors harvesting losses who want to sell the specific lots trading below cost
Who it's not for
- Positions bought in a single purchase, where there is only one cost basis
- Accounts inside IRAs and 401(k)s, where lot selection has no tax effect
- Mutual fund holders who have already elected average cost and do not want to change methods going forward
How it works
Every purchase of a security creates a tax lot with its own cost and purchase date. When you sell part of a holding, the gain or loss depends on which lot is treated as sold. Under the regulations, if you do not adequately identify the shares, the oldest shares are treated as sold first.
To use specific identification, you tell your broker which lots to sell no later than the settlement date, and the broker confirms it in writing. Most brokers let you set a standing method, such as highest cost or tax-efficient loss harvesting, or choose lots trade by trade.
Highest cost is not always best. A high-cost lot held one year or less produces short-term gain at ordinary rates. Sometimes a slightly lower-cost lot held longer than a year gives a lower tax. Look at both the basis and the holding period of each lot.
For mutual funds and dividend reinvestment plans, average cost is also allowed. Brokers report basis for covered securities on Form 1099-B, so the method you choose must match what the broker reports.
Choosing high-cost lots defers gain rather than removing it. The low-cost shares remain, and their gain is taxed when sold, unless they are given to charity or held until death, when heirs generally receive a stepped-up basis.
Illustrative example
Illustrative: an investor owns 2,000 shares of one stock in two lots, both held more than one year: 1,000 shares bought in 2014 at $40, and 1,000 shares bought in 2024 at $140. She sells 1,000 shares at $150. She is in the top bracket and pays 20% plus the 3.8% investment tax.
- Sale proceeds: 1,000 x $150 = $150,000
- FIFO (2014 lot): gain = $150,000 - $40,000 = $110,000; tax = $110,000 x 23.8% = $26,180
- Specific ID (2024 lot): gain = $150,000 - $140,000 = $10,000; tax = $10,000 x 23.8% = $2,380
- Tax deferred this year: $26,180 - $2,380 = $23,800
In this illustration, naming the 2024 lot defers $23,800 of tax on the same $150,000 sale.
The rules
| Rule | Citation |
|---|---|
| If shares cannot be adequately identified, the shares acquired first are treated as sold first. | Treas. Reg. §1.1012-1(c)(1) |
| For shares held by a broker, adequate identification requires specifying the lots by the settlement date, with written confirmation from the broker. | Treas. Reg. §1.1012-1(c)(8) |
| Average basis may be used for regulated investment company shares and dividend reinvestment plan shares. | Treas. Reg. §1.1012-1(e) |
| Brokers report cost basis for covered securities on Form 1099-B. | IRC §6045(g) |
Watch-outs
- Instructions given after settlement do not count. Set the method before you trade.
- Selling a loss lot and buying the same security within 30 days before or after triggers the wash-sale rule, which disallows the loss for now.
- Changing a mutual fund away from average cost has rules about which shares the change applies to. Check before switching.
- Digital asset holders must identify units by wallet or account under the IRS transition rules (Rev. Proc. 2024-28). Keep records in the same place you hold the assets.
What we do
We review your lots before large sales, show the tax under FIFO, highest cost, and a tax-efficient mix, and coordinate the standing instruction with your broker or advisor. We reconcile the Form 1099-B to the lots you chose before filing.
Questions
Can I choose lots after the year ends?
No. The identification must be made with the broker by the trade's settlement date.
Does this reduce my tax permanently?
Usually it defers it. The lower-cost shares still carry their gain, though giving them to charity or holding them until death can mean that gain is never taxed.
What if my broker reported the wrong lots?
If you made a timely, confirmed identification, the return should follow it. Ask the broker for a corrected 1099-B so the forms match.