Specific ID vs FIFO: Which Cost Basis Method Saves You More on Taxes

When you sell stocks or ETFs, the cost basis, the original value of an asset for tax purposes, used to calculate capital gains or losses. Also known as purchase price, it determines how much tax you owe when you sell. The two most common ways to track it are Specific ID and FIFO. These aren’t just accounting jargon—they directly impact your tax bill. Specific ID lets you pick which shares to sell. FIFO automatically sells the oldest shares first. Choosing the wrong one could mean paying hundreds more in taxes every year.

Here’s how they work in real life. Say you bought 100 shares of a stock in January at $50, then another 100 in June at $70. If the price hits $80 and you sell 100 shares, FIFO forces you to sell the January shares. That’s a $30 gain per share, or $3,000 total. But with Specific ID, you can choose to sell the June shares instead. That’s only a $10 gain per share—$1,000 in taxable profit. You just saved $400 in taxes (at 20% long-term rate). That’s not theory. That’s what people do when they manage their own portfolios. Most brokers let you choose Specific ID, but you have to set it up ahead of time. If you don’t, they default to FIFO. And FIFO isn’t always bad—if you’re holding for the long term and prices are rising, selling older shares might mean bigger gains, but you also lock in those gains permanently.

But here’s the catch: Specific ID requires recordkeeping. You need to track each purchase date, price, and quantity. If you’re using a brokerage like Fidelity or Schwab, their tools make this easier, but you still need to log in and select shares before selling. FIFO? It’s automatic. No effort. But no control. For someone who buys regularly and wants to minimize taxes, Specific ID is the smarter move. For someone who just wants to set it and forget it, FIFO works—but you’re leaving money on the table. And if you’ve ever sold shares after a big market dip, you know how much difference a few dollars per share can make over time. The posts below show you exactly how to use these methods with real examples, how to avoid common mistakes, and how to tie them into broader tax strategies like Roth conversions and dividend timing. You’ll find guides on rebalancing, tax-efficient investing, and how to use tools that make Specific ID manageable—even if you’re not an accountant.