You bought the same fund four times over six years at different prices. Now you sell a quarter of the position. Which shares did you sell?
The answer is not obvious, it is a choice, and it determines your capital gain. Sell the oldest shares bought cheaply and you realise a large gain. Sell the most recent ones bought near current prices and you realise very little.
Most people never make the choice, so the broker's default makes it for them.
What changed in 2026
- Brokers improved lot selection interfaces. Choosing lots at the point of sale became easier across more platforms.
- Basis reporting stayed comprehensive. Brokers report basis to tax authorities for covered securities, which makes the elected method visible.
- Direct indexing raised the profile. Strategies built around lot-level harvesting made lot selection a mainstream concept.
- The election timing rule stayed firm. Selecting lots after settlement remained impermissible.
The methods
| Method |
Sells |
Effect |
| First in, first out |
Oldest lots |
Often the largest gain; usually the default |
| Last in, first out |
Newest lots |
Often smallest gain; may be short-term |
| Highest cost first |
Most expensive lots |
Minimises current gain |
| Lowest cost first |
Cheapest lots |
Maximises current gain |
| Specific identification |
Whatever you choose |
Full control |
| Average cost |
Blended basis |
Limited to certain fund holdings |
First in, first out is the common default and frequently the worst outcome, because your oldest shares usually have the lowest basis and therefore the largest gain.
Highest cost first minimises the gain realised now, which is the sensible default for most people most of the time.
Specific identification lets you pick individual lots, which is what you want when the optimal choice is not simply the highest cost — for instance selecting a long-term lot over a short-term one even where the short-term lot has higher basis, because the rate difference outweighs the basis difference.
Timing matters
The rule that catches people: the lot election must be made at or before settlement. You cannot decide in the following January, when preparing your return, which shares you sold last June.
Practically that means setting a default method in your brokerage account, and overriding it at the point of sale when a specific choice matters. Some brokers let you adjust shortly after a trade and before settlement; none let you revise it months later.
Keep the confirmation. Where you elect specific lots, the broker's record is your documentation.
When each makes sense
Minimising gain now — highest cost first — suits most situations: you are in a normal tax year, you want the smallest current bill, and deferring gain is generally valuable.
Realising gain deliberately — lowest cost first — suits an unusually low-income year, where gain might be taxed at a very low or zero rate. Realising gain cheaply now resets basis higher and reduces future gains. This is deliberate and counterintuitive, and it is genuinely valuable in a gap year, an early retirement year, or a year with large offsetting losses.
Preferring long-term lots matters because long-term and short-term gains are taxed differently. A lot held slightly over a year may be preferable to one with higher basis held under a year — see capital gains tax explained.
Harvesting losses requires selecting the specific lots with losses, which the default methods will not do reliably — see tax loss harvesting.
Common mistakes
- Never changing the default. First-in-first-out is rarely optimal.
- Trying to elect after settlement. Not permitted.
- Ignoring the holding period. Rate difference can outweigh basis difference.
- Selecting lots in a tax-advantaged account. No tax consequence there.
- Triggering the wash sale rule while harvesting. Buying a substantially identical security nearby disallows the loss — see wash sale rule explained.
- Not keeping records. Documentation matters if questioned.
- Using average cost when specific identification would serve better. Some methods are irrevocable once used for a holding.
FAQ
Can I change my default method?
Generally yes, for future sales. Some methods, particularly average cost for certain fund holdings, become binding for that holding once used — check before switching.
What if I use several brokers?
Methods are set per account. A holding split across brokers is tracked separately, and neither broker knows about the other.
Does this apply to a retirement account?
No. Sales inside a tax-advantaged account have no immediate tax consequence, so lot selection is irrelevant there.
How do I know what my lots are?
Your broker reports them. Reviewing them before a large sale is worth the five minutes, particularly to see which lots are long-term.
Where to go next
For the rates that make the holding period matter, read capital gains tax explained. For basis mechanics, cost basis explained, and for deliberate loss realisation, tax loss harvesting.
This is general information, not tax advice. Rules on lot election and method changes are specific; confirm with your broker or a qualified preparer.