Specific identification basis

The specific identification method (or SpecID) allows you to choose which specific tax lot to sell when you liquidate shares, usually choosing the highest-cost lot to minimize your capital gain and tax bill. It requires written instruction to your broker at the time of sale but offers the greatest tax flexibility of any basis method.

How specific identification works

When you own multiple tax lots of the same stock or fund and you want to sell, you tell your broker, “Sell 100 shares and use the lot purchased on January 15, 2020, at $75 per share.” Your broker removes that specific lot; the gain is calculated from that lot’s cost basis, not from others.

Example: You own Apple stock in three lots:

• Lot A (Jan 2020): 100 shares at $75 cost basis
• Lot B (Jun 2021): 100 shares at $120 cost basis
• Lot C (Mar 2023): 100 shares at $150 cost basis

Current price: $200 per share.

If you sell 100 shares without instruction, most brokers default to FIFO, selling Lot A first, giving a gain of $12,500 ($100 × 100). With specific identification, you would sell Lot C—the highest-cost, newest lot—giving a gain of only $5,000 ($50 × 100). That is a difference of $7,500 in taxable gain, or roughly $1,125 in federal tax (at 15% long-term rate).

Why this matters

The difference between defaulting to FIFO (selling old, low-cost lots first) and using specific identification (selling new, high-cost lots first) can be tens of thousands of dollars over a lifetime. Investors who bought into index funds or stocks decades ago and let them compound are sitting on huge embedded gains in old lots. Without specific identification, they are forced to realise the largest gains; with it, they can minimise gains and reinvest in a tax-efficient way.

How to instruct your broker

Contact your broker in writing—email is usually accepted—at the time of sale with the specific lot. Include:

1. The security name and symbol
2. Number of shares to sell
3. The acquisition date and cost basis of the lot to sell
4. The sale date and price

Your broker should confirm in writing. If they do not, follow up. Some brokers have online tools; others require email. Fidelity, Vanguard, and Schwab all allow specific identification; confirm with yours if you are unsure.

Important: Instruct at the time of sale. If you do not, you cannot retroactively claim specific identification on your tax return; the IRS will assume you used the default method.

Documentation and tax reporting

Your broker will report the cost basis of the lot you sold on Form 8949. Keep your written instruction and the broker’s confirmation for your records. If the IRS questions your reported basis, you will need to produce this documentation.

Advantages

Maximum flexibility. You choose your strategy each year. Low-gain years, you can sell appreciated lots at long-term rates. High-gain years, you can sell at cost to harvest losses or avoid bumping to a higher bracket.

No IRS approval. Unlike LIFO, switching to specific identification does not require IRS permission. You can use it once and switch back to FIFO the next year if you want.

Audit-proof. If you follow the procedure—written instruction at time of sale—your cost basis is defensible and transparent.

Disadvantages

Requires discipline. You must remember to instruct your broker and keep documentation. One forgotten instruction and you default to FIFO.

Complexity. If you have many lots, calculating the optimal strategy takes work. Consider working with a tax professional if your portfolio is large or complex.

See also