I feel like I should point out here that there is also SpecID (Specific Share Identification), which is another way of identifying which of your inventory/lots you want to sell.
SpecID can come in very useful if you want to maximize control of the amount of capital gain/loss that you take on when partially selling your position after dollar cost averaging or otherwise buying into it over many purchases.
For example, assume you've been dollar cost averaging into a security over the course of 5 years, and now want to start selling. You can use SpecID to sell only the specific lots that you bought between 1 and 2 years ago, so that you get taxed at long term gain rates, but otherwise realize the least amount of gains of all your lots (assuming the security has been appreciating at a stable rate). Neither FIFO nor LIFO would allow you to do that: FIFO would grab the oldest, most appreciated lots, while LIFO would grab the lots that have not yet aged into LT gain.
That's so funny you mentioned this because I asked one time on a forum if something like that were possible and got absolutely roasted for "such a stupid question"... I'm super glad my thinking was on the right track. Thanks for the explanation. What brokers allow you to do that, btw?
Thanks for pointing this out. As mentioned I am not an accountant, but the specific stock method did come up also. I decided to skip it in the interest of brevity (article was already getting way too big). However this is an interesting insight, thank you.
SpecID can come in very useful if you want to maximize control of the amount of capital gain/loss that you take on when partially selling your position after dollar cost averaging or otherwise buying into it over many purchases.
For example, assume you've been dollar cost averaging into a security over the course of 5 years, and now want to start selling. You can use SpecID to sell only the specific lots that you bought between 1 and 2 years ago, so that you get taxed at long term gain rates, but otherwise realize the least amount of gains of all your lots (assuming the security has been appreciating at a stable rate). Neither FIFO nor LIFO would allow you to do that: FIFO would grab the oldest, most appreciated lots, while LIFO would grab the lots that have not yet aged into LT gain.