Investor guide · 8 min · Reviewed 2026-09-02
Cost Basis Methods Explained (FIFO, Specific ID & More)
Cost basis is what you paid (adjusted) for a lot you sell. Methods like FIFO or specific identification decide which lot is sold when you hold multiple purchases - and that can change gain size and holding period. Educational overview only.
Why basis matters
Gain or loss ≈ proceeds minus adjusted basis. Get basis wrong and you mis-report tax. Corporate actions, reinvested dividends, and wash-sale adjustments can change basis.
Common methods
FIFO sells oldest lots first. Specific identification lets you point at a lot when your broker and local rules allow. Average cost appears more often for mutual funds than for many brokerage stock lot systems. Defaults differ by broker - check settings before tax season.
Harvesting link
When you harvest a loss, which lot you sell can decide how large the loss is and whether wash-sale rules latch onto a recent repurchase. Plan the lot, not only the ticker.
Use StockWatch next
Pair with wash-sale, harvesting, and short-term vs long-term guides. StockWatch does not store your broker lots.
Simple illustration
Educational numbers only - not your return.
You bought 50 shares at $100 and later 50 at $150. Selling 50 at $120 under FIFO may produce a different gain than specifically identifying the $150 lot - and holding periods can differ too.
Interactive worksheet
Capital gains worksheet
Educational tool only - not tax, legal, or investment advice.
Sketch one sale, then optionally fold in other realized gains/losses for the year. This is worksheet math - not a filing estimate.
Enter proceeds and cost basis to estimate the gain or loss on one disposal.
Common mistakes
- Leaving the broker on a default you never reviewed.
- Changing methods casually without checking local rules.
- Forgetting DRIP shares create new lots.
- Assuming crypto exchanges use the same lot language as stock brokers.
Continue on StockWatch
Guide FAQ
Short answers for discovery.
Can I switch methods every trade?
Depends on broker tools and tax rules. Some methods require consistency. Confirm before you rely on a tactic.
Does StockWatch pick lots for me?
No. We do not connect to your brokerage tax lots.
Is average cost always allowed for ETFs?
Not universally. Many brokerage equity ETF sales use lot methods instead. Check your account documents.