Cost basis and lot selection
What it is: what you paid. Your taxable gain is the sale price minus your basis, so basis decides the bill.
Why it is not automatic: if you bought the same stock several times, you own several *lots* at different prices. Which one you sell is a choice — and most brokers default to FIFO (oldest first), which is often the highest-gain lot.
The methods:
• FIFO — oldest shares first. Common default.
• Specific identification — you name the lot. Most control, and you must elect it at the time of sale.
• Average cost — mainly for mutual funds.
What to do: find the lot-selection setting in your broker before you need it. Choosing a high-basis lot when trimming a winner can cut the tax substantially.
Chart: three lots of the same stock, sold at the same price.