In the United States, the Internal Revenue Service (IRS) allows investors to sell stock using various methods to select the basis of stock when a sale of stock does not liquidate an investor's position. Commonly investors may select stock sales as "first in, first out" (FIFO) or "last in, first out" (LIFO) methodologies depending on the basis, or adjusted cost, of these shares. These methods are typically used in tax planning.
Selling Stock with LIFO or FIFO
Determine which method of basis selection is preferential. Investors will choose between LIFO and FIFO methods dependent on the relative basis of the stock and whether they are trying to defer income by recognizing minimal gains or the maximum amount of loss or whether they are instead trying to accelerate income by recognizing the maximum amount of gains or the minimum amount of loss.
Contact your broker (or other trading agent) with your sale order. If you choose to use the FIFO method of basis selection, it is not necessary to include any additional information. Under IRS rules, FIFO is the default method of basis selection and will be automatically applied by your broker absent other trading instructions.
If you wish to use the LIFO method, specify to your broker that you wish to utilize this method of basis selection, using the specific identification of the last shares acquired.
Ensure you receive written confirmation from your broker of the execution of your sell order using the specific identification of the last shares acquired. Under IRS rules, failure to obtain this written confirmation from your broker in a timely manner invalidates your selection.
First in, first out (FIFO) means that the first shares of stock to be sold are the first shares acquired. If the stock's value has constantly increased, these will be the shares of stock with the lowest basis, and then the most gain or lowest amount of loss. Conversely, last in, first out (LIFO) means that the first shares of stock to be sold are the last shares acquired. If the stock's value has constantly increased, these will be the shares of stock with the highest basis, and then the least gain or greatest amount of loss.
Basis is typically the investor's cost of the stock, although it may differ when the shares of stock were inherited.
The IRS does not formally recognize the last in, first out (LIFO) methodology. Instead, it recognizes the "specific identification" methodology. When the specific identification methodology is used to indicate the last shares acquired, it is equivalent to the LIFO methodology.