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LearnFAQTax Optimization

Which cost basis method should I choose to minimize taxes when I sell?

Answer

Specific identification (specific lot) usually gives the most control: you pick exactly which shares to sell, letting you sell high-basis lots to shrink a gain or select loss lots to harvest. The common defaults are FIFO (first-in-first-out), which sells your oldest, often lowest-basis shares first and can maximize gains, and average cost, offered mainly for mutual funds. To use specific ID you must identify the lots at or before the sale and get broker confirmation, so set it up before you trade. Choosing HIFO-style (highest-in, first-out) selling of your priciest lots minimizes current gains, while selling low-basis lots on purpose can be smart in a 0%-bracket year. Set your default to specific identification at your broker to keep flexibility.

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