FIFO
An IRS-recognized cost basis accounting method that assumes the shares purchased first are sold first when only some shares of a holding are disposed of, determining which lots' basis and holding periods apply to the sale.
FIFO — First In, First Out — is the default cost basis accounting method used by the IRS for securities sales when no other method has been specified. Under FIFO, when you sell a portion of your shares in a security that you acquired in multiple purchases over time, the tax system treats you as having sold the oldest shares first — those you bought earliest in your holding history.
The FIFO rule has significant tax implications because the oldest shares typically carry the lowest cost basis (assuming you have been buying into a position in a rising market) and are also most likely to have a long holding period qualifying for long-term capital gains rates. In a market where the stock has appreciated, FIFO tends to maximize the realized gain on each sale — the opposite of what most investors want from a tax minimization standpoint, since older low-basis shares will generate larger gains than recently purchased higher-basis shares.
However, FIFO can be advantageous in a falling market. If share prices have declined since your earlier purchases, selling the older low-basis shares first maximizes any remaining gains taxed at favorable long-term rates (since they are likely held long-term), while preserving newer higher-basis shares. The logic reverses depending on market direction and your specific purchase history.
FIFO applies automatically unless you notify your broker in advance of the sale that you want to use a different method — typically specific identification. Once a sale is executed, you generally cannot retroactively change the accounting method for that transaction. For mutual funds, both FIFO and average cost are common options; individual stock investors generally choose between FIFO and specific identification.
Brokers track FIFO on a lot-by-lot basis and reflect the chosen method in the cost basis reported on Form 1099-B. Tax software that imports 1099-B data will apply the method your broker used. Investors who want to deviate from FIFO must elect specific identification proactively — before the sale — and obtain a written confirmation from the broker identifying the specific lots being sold.