HIFO tax basis method

The HIFO method (Highest In, First Out) is a cost basis approach where you sell the highest-cost tax lot first, minimising your capital gain and tax bill. HIFO is effectively the same as choosing specific identification by always selecting the highest-cost lot. It offers excellent tax efficiency and is increasingly popular with tax-conscious investors.

How HIFO works

Suppose you own 300 shares in three lots:

• Lot 1 (2015): 100 shares at $50
• Lot 2 (2020): 100 shares at $120
• Lot 3 (2024): 100 shares at $180

Current price: $200 per share. You want to sell 100 shares.

HIFO approach: Sell Lot 3 (highest cost at $180). Gain = $200 - $180 = $20 × 100 = $2,000 gain.

FIFO approach (default): Sell Lot 1. Gain = $200 - $50 = $150 × 100 = $15,000 gain.

By choosing HIFO, you save $13,000 in taxable gain. At a 15% long-term rate, that is roughly $1,950 in federal tax saved on a single transaction.

Why HIFO is powerful

HIFO is mathematically the most tax-efficient method available. By always selling the highest-cost lot, you minimise every single gain, maximising the amount you can reinvest tax-free.

Over decades, especially with dollar-cost averaging into positions, HIFO can preserve hundreds of thousands of dollars that would otherwise go to tax.

How to use HIFO

HIFO is not a pre-packaged election like FIFO, LIFO, or average cost. Instead, you implement it through specific identification:

1. At the time of sale, write to your broker with the specific lot you want to sell.
2. Identify the lot with the highest cost basis.
3. Request that the broker sell that lot.
4. Keep documentation of your instruction.

Modern brokers like Fidelity, Vanguard, and Schwab have made this easier. Some now offer “HIFO” as a named option in their trading interfaces, automatically calculating the highest-cost lot for you.

Brokers supporting HIFO

Fidelity: Supports HIFO selection in the trade ticket. You can set a default to “always use HIFO” for a given security.

Vanguard: Allows specific identification of any lot; you must identify the high-cost lot manually.

Schwab: Supports specific identification and has streamlined the process.

Smaller brokers: Check their documentation. If they support specific identification, you can implement HIFO by hand.

Advantages over FIFO

The difference between HIFO and FIFO is enormous for long-term investors:

• FIFO sells your oldest, cheapest lots first—maximising gains.
• HIFO sells your newest, most expensive lots first—minimising gains.

The gap widens the longer you hold and the more volatile your purchase prices are.

Disadvantages and limitations

Not automatic. You must remember to instruct your broker at each sale. One forgotten instruction and it defaults to FIFO.

Requires discipline. If you trade frequently, specifying lots repeatedly becomes tedious.

No availability for mutual funds. Most mutual fund platforms do not allow specific identification; they default to average cost or FIFO.

See also