Tax lot

A tax lot is a single purchase of a stock, bond, or other security at a specific price on a specific date. When you own multiple tax lots of the same holding—bought at different prices or times—you can choose which lot to sell when you liquidate, controlling the size of your capital gain and your tax bill. This choice is the foundation of tax-efficient investing.

Example: multiple lots, one security

Suppose you buy Apple stock three times:

• January 2022: 100 shares at $150 = $15,000 (Lot A)
• June 2023: 100 shares at $175 = $17,500 (Lot B)
• March 2024: 100 shares at $200 = $20,000 (Lot C)

You now own 300 shares and have three tax lots. If you decide to sell 100 shares at $250, you have a choice: which lot do you sell?

• Sell Lot A (cost $150): gain of $100 per share = $10,000 gain.
• Sell Lot B (cost $175): gain of $75 per share = $7,500 gain.
• Sell Lot C (cost $200): gain of $50 per share = $5,000 gain.

The tax on that sale depends entirely on which lot you choose. If you sell Lot A and owe 15% on the gain, you pay $1,500 in tax. If you sell Lot C, you pay only $750. That is a difference of $750 on a single transaction—magnified across a portfolio over years, the difference can be tens or hundreds of thousands of dollars.

Lot identification methods

The IRS allows several ways to designate which lot you are selling:

Specific identification. You explicitly tell your broker which lot to sell—usually the highest-cost one to minimize gain. This requires written instruction (email or broker form) at the time of sale. It is the most tax-efficient method but requires discipline.

FIFO (First In, First Out). Without instruction, you are assumed to sell the oldest lot first. This is the IRS default and also the default for many brokers. It is often the worst choice if you have old lots with very low bases.

LIFO (Last In, First Out). You sell the newest lot first. Useful if recent purchases are at higher prices. Requires explicit election.

Average cost. All your lots are averaged together; you sell at the average price. Simple but rarely optimal. Often used for mutual funds.

Once you elect a method for a given security, you must use it consistently. Switching requires IRS approval.

Wash-sale and lot identification

The wash-sale rule complicates lot management. If you sell a lot at a loss and repurchase within 30 days, the loss is disallowed and added to the cost basis of the new lot. This can make a loss-harvesting trade more complicated: plan carefully to avoid accidental wash-sales.

Inherited lots: step-up

When you inherit stock, each lot you inherit receives a step-up in basis—the cost basis becomes the fair market value at the date of death, not the decedent’s original purchase price. This means you can sell the entire position immediately with zero tax. This is often called the “step-up loophole,” a major tax advantage of inherited assets.

Tracking and documentation

Your broker is required (for securities acquired after 2011) to track your lots and report your cost basis on Form 8949. For older securities, you may need to track your cost basis yourself. Keep purchase confirmations, dividend reinvestment records, and stock split notices. If you transfer to a new broker, confirm that all lot information transfers accurately.

See also