Cost Basis: Selecting a Tax Lot ID Method

It's amazing what you can learn when you apply yourself. For years I dealt with the fact that my trading performance did not align with my platform's cost basis tracking. In other words, my trading platform used a different cost basis for gains tracking than I used in my spreadsheets for tracking my performance. Finally, I asked myself "I wonder if my trading platform has another method I can use for the cost basis?"

My trading platform uses first-in, first-out (FIFO) as the default tax lot identification method for equities and mutual funds and I've used their default method my entire trading career. However, I usually sell my lowest cost trades first. Therefore, the two methods were never really in sync. Take a look at the following example:
  • Transaction #1 - Purchase #1 XYZ Shares @ $11.00
  • Transaction #2 - Purchase #2 XYZ Shares @ $10.50
  • Transaction #3 - Purchase #3 XYZ Shares @ $10.00
  • Transaction #4 - Sell #1 XYZ Shares @ $10.50
  • Transaction #5 - Sell #2 XYZ Shares @ $11.00
  • Transaction #6 - Sell #3 XYZ Shares @ $11.50
Using the FIFO method, Transaction #4 would have been sold at a $0.50 loss because it would have been connected to Transaction #1 (Purchase #1 - the first purchase).

Using the "Lowest cost" method, Transaction #4 would have been sold at a $0.50 gain because it would have been connected to Transaction #3 (Purchase #3 - the lowest cost).

The net result of all the trades is the same regardless of the tax method used but for me, I usually prefer to sell the lowest cost first. By the way, in the example above, Transaction #1 should have been sold at a STOP-LOSS somewhere between $10.00 and $10.50.

Well it only took my 20 years but I recently changed my Tax lot ID method to "Lowest cost" which will much more closely align with my trading method.

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This is for informational purposes only and the information provided does not encompass all possible or probable outcomes and nothing posted here is an indication of future results. Nothing in this blog is a guarantee or promise of future investment returns and investing in stocks or bonds carries risks including losing your entire investment. I do not recommend, advocate or endorse any third-party links, resources or advertisements of any kind. Any investment decisions are recommended to be in conjunction with a Certified Financial Planner, a comprehensive and personal financial plan and all other components that make up your own financial situation.

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