Cost Valuation Methods: FIFO, LIFO, Identified Shares
Chapters in this video
- 0:00 The $2,000 tax bill hidden in one trade
- 1:42 FIFO (first-in, first-out) and the default rule
- 2:56 LIFO (last-in, first-out) and the rising market flip
- 4:14 Specific identification and the settlement date trap
- 5:08 Rising vs declining market comparison matrix
- 5:36 Holding period and short-term vs long-term gains
- 6:03 Rapid-fire exam recap
What this video covers
- Why FIFO (first-in, first-out) is the default method when an investor does not specify which shares to sell
- How FIFO produces the largest gain in a rising market by selling the oldest, lowest-cost shares first
- How LIFO (last-in, first-out) produces the smallest gain in a rising market by selling the newest, highest-cost shares first
- Why LIFO produces the largest loss in a declining market, and FIFO produces the smallest loss
- What specific identification (identified shares) is, and why it offers maximum flexibility for tax planning
- The settlement date deadline for specific identification, and why choosing at year-end is always wrong
- How the cost valuation method chosen can flip a gain between short-term and long-term based on holding period
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