{"post":{"slug":"tax-lot-selection-explained-2026","title":"Tax Lot Selection: Choosing Which Shares You Sold","excerpt":"When you sell part of a holding bought at different prices, which shares you sold determines your tax bill. Most people let the broker decide, and the default is rarely optimal.","category":"finance","date":"January 14, 2026","author":"ByteLedger Team","content":"<span class=\"dropcap\">Y</span>ou 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?\n\nThe 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.\n\nMost people never make the choice, so the broker's default makes it for them.\n\n## What changed in 2026\n\n- **Brokers improved lot selection interfaces.** Choosing lots at the point of sale became easier across more platforms.\n- **Basis reporting stayed comprehensive.** Brokers report basis to tax authorities for covered securities, which makes the elected method visible.\n- **Direct indexing raised the profile.** Strategies built around lot-level harvesting made lot selection a mainstream concept.\n- **The election timing rule stayed firm.** Selecting lots after settlement remained impermissible.\n\n## The methods\n\n| Method | Sells | Effect |\n| --- | --- | --- |\n| First in, first out | Oldest lots | Often the largest gain; usually the default |\n| Last in, first out | Newest lots | Often smallest gain; may be short-term |\n| Highest cost first | Most expensive lots | Minimises current gain |\n| Lowest cost first | Cheapest lots | Maximises current gain |\n| Specific identification | Whatever you choose | Full control |\n| Average cost | Blended basis | Limited to certain fund holdings |\n\n**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.\n\n**Highest cost first** minimises the gain realised now, which is the sensible default for most people most of the time.\n\n**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.\n\n## Timing matters\n\nThe 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.\n\nPractically 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.\n\nKeep the confirmation. Where you elect specific lots, the broker's record is your documentation.\n\n## When each makes sense\n\n**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.\n\n**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.\n\n**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](/blog/capital-gains-tax-explained-2026).\n\n**Harvesting losses** requires selecting the specific lots with losses, which the default methods will not do reliably — see [tax loss harvesting](/blog/tax-loss-harvesting-2026).\n\n## Common mistakes\n\n- **Never changing the default.** First-in-first-out is rarely optimal.\n- **Trying to elect after settlement.** Not permitted.\n- **Ignoring the holding period.** Rate difference can outweigh basis difference.\n- **Selecting lots in a tax-advantaged account.** No tax consequence there.\n- **Triggering the wash sale rule while harvesting.** Buying a substantially identical security nearby disallows the loss — see [wash sale rule explained](/blog/wash-sale-rule-explained-2026).\n- **Not keeping records.** Documentation matters if questioned.\n- **Using average cost when specific identification would serve better.** Some methods are irrevocable once used for a holding.\n\n## FAQ\n\n**Can I change my default method?**\nGenerally yes, for future sales. Some methods, particularly average cost for certain fund holdings, become binding for that holding once used — check before switching.\n\n**What if I use several brokers?**\nMethods are set per account. A holding split across brokers is tracked separately, and neither broker knows about the other.\n\n**Does this apply to a retirement account?**\nNo. Sales inside a tax-advantaged account have no immediate tax consequence, so lot selection is irrelevant there.\n\n**How do I know what my lots are?**\nYour broker reports them. Reviewing them before a large sale is worth the five minutes, particularly to see which lots are long-term.\n\n## Where to go next\n\nFor the rates that make the holding period matter, read [capital gains tax explained](/blog/capital-gains-tax-explained-2026). For basis mechanics, [cost basis explained](/blog/cost-basis-explained-2026), and for deliberate loss realisation, [tax loss harvesting](/blog/tax-loss-harvesting-2026).\n\nThis is general information, not tax advice. Rules on lot election and method changes are specific; confirm with your broker or a qualified preparer.","hue":282,"metaTitle":"Tax Lot Selection: Choosing Which Shares You Sold","metaDescription":"How tax lot selection methods change your capital gains bill, why specific identification requires timely election, and when each approach makes sense.","keywords":["tax lot selection","specific identification shares","fifo cost basis","highest cost first","capital gains management","cost basis method","brokerage tax settings","tax planning 2026"],"tldr":["**The default method is usually first-in-first-out** — which sells your oldest, often lowest-basis, shares.","**Specific identification gives you the most control** — you choose exactly which lots to sell.","**You must elect the lot at or before the trade settles** — retroactive selection is not permitted.","**Highest-cost-first minimises gain now; lowest-cost-first may suit a low-bracket year** — the right choice depends on your situation.","**Skip:** obsessing over lot selection in a tax-advantaged account. It has no tax consequence there."],"readTime":"4 min read","wordCount":859},"related":[{"slug":"best-crypto-tax-strategies-2026","title":"Best crypto tax strategies in 2026: legal moves to lower your bill","excerpt":"Real, legal crypto tax strategies for 2026. Lot selection, harvesting, structuring — what works and what is a sales pitch.","category":"finance","date":"January 28, 2026","author":"ByteLedger Team","readTime":"3 min read","hue":290},{"slug":"crypto-tax-lots-2026","title":"Crypto Tax Lots: Why Your Basis Records Matter More Now","excerpt":"Which specific units you sold determines your gain, and reporting rules have tightened around how lots are tracked. 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